The concept of taxation exists since 1913 but still, calculating and paying taxes is probably every entrepreneur’s least favorite task. They have to keep up with ever-evolving taxation laws since the government makes amendments to existing tax regulations every year. From accountable plans to Section 179 deductions, you must stay on top of all changes to prepare for the year ahead.
Similarly, you have to look into tax policies and find ways to reduce the company’s taxable liability. Most business owners may not be aware of it, but there are several tax-saving options. You can account for depreciation, value stock appropriately, and seek exemptions on capital gains. In addition to reducing the tax burden, it allows companies to enjoy higher profits. If you are clueless about the tax world, let us show you the ropes. Here are seven tax-saving tips for small businesses.
Seek Exemptions from Capital Gains
When companies sell plants, property, and equipment at a higher price than its cost, it results in a capital gain. Usually, entrepreneurs add such profits in financial statements and charge tax on them. According to the section 53 and 54H introduced by Finance Ministry, capital gains are non-taxable.
However, to understand these laws, you will need to gain more than the basic tax know-how. You can either look for short courses on taxation or opt for online MST programs to understand tax exemptions and regulations in detail. You will learn how to leverage exemptions, reduce taxable income, and enjoy high capital gains.
Utilize Section 179 Opportunities
Under section 179, the businesses can deduct the total purchase price of the fixed asset bought during the tax year. Hence, whether you purchased a piece of machinery for $500 or $10,000, you can include it in your deductibles. The deductions from gross income will maximize the machinery’s value while lowering the company’s total cost basis. You can either list this purchase under the expenses section of the income statement or highlight the deduction in cash flows. It will reduce the overall taxable income and tax liability, letting you save a few bucks.
Change the Business Structure
When legally registering the business, you must decide what form of business entity you want to establish. After all, you will be on the hook for the entire amount of Medicare and Social security taxes. Hence, identify the business structure because every entity has different tax policies and deductions. If your company comes under a limited liability company, you have to pay taxes under all circumstances.
Employ A Family Member
Do you have any family members on the team? Well, hiring a family member can significantly reduce taxes for your small business. According to Scott Goble, entrepreneurs have to pay a lesser tax marginal rate when hiring family members. Likewise, they can also eliminate the tax on income paid to their children. Additionally, the internal revenue service (IRS) allows small business owners to further reduce taxes by hiring their spouses. The spouse won’t be subject to the FUTA tax, decreasing the overall taxable income.
Value Stock Accurately
Typically, business owners value stock at the actual price, but there are more ways to go about it. If the inventory has a short shelf life, you can appreciate it on the principle of cost. Otherwise, you can value the stock at net realizable value (NRV) and determine the actual net worth of stock. These practices will prevent stock overvaluation, reducing closing inventory, gross profit, and taxes. However, you have to be consistent with this stock valuation method throughout to avoid IRS audits.
Most people find indexation confusing, but it is a pretty straightforward concept. It integrates the time value of money to determine the cost of assets ten years from now. Let’s assume you purchase a property for $10,000 in 2010, and now in 2021, you want to sell it for $70,000. You might think the tax charged on long-term capital will be up to 20% of the sales price, but that’s not the case.
Every year the Finance Ministry announces a cost inflation index (CII) to calculate the indexed cost of capital gain. You have to multiply the CII of the sale year with the original cost. After this, you have to divide the amount by CII of the year of purchase and find the indexed cost of acquisition. It will ensure your long-term capital gain isn’t unfairly taxed.
Account for Depreciation
Does your business have multiple fixed assets? Although entrepreneurs purchase assets in a specific period, they must depreciate the asset over its useful life. You can account for depreciation under the expense category in financial statements to reduce taxable income. According to the income tax act, you also claim additional depreciation in the year of purchase. For instance, if you install new machinery during the year, you can claim a further depreciation of up to 20% when the machinery is operational. In addition to reducing tax liability, charging depreciation ensures compliance with accounting standards.
The taxation world plays by the concept of a penny saved, is the penny earned. Small business owners make consistent efforts to dodge tax returns without violating the legal jurisdictions. The IRS provides different options to shelter income and reduce taxes. For starters, you can hire family members and value stock correctly. Likewise, you can also claim indexation, seek exemption on gains, and restructure the business to save up some dollars on taxes.