For the majority of people tax due dates are on April 15th, but companies must file (and be able to pay) taxes throughout the year. Your choices throughout the year can affect your company’s tax obligations. If you’re the first time having to file a tax return for business You may be concerned about the amount you owe the federal government.
What is the tax obligation?
Tax liability is the sum of taxes that you owe government officials such as the U.S. Internal Revenue Service (IRS) as well as the local or state government. Tax liabilities include income tax, tax on employment as well as tax on capital gains and tax owed in the past that hasn’t been paid. In the end, everything you’re legally required to pay taxes is considered a tax obligation.
How can I lower my tax deductible income?
In terms of business costs to prudent investments, there’s various strategies intelligent business owners can employ to decrease the percentage of their income from business which is tax deductible.
1. Be aware of the deductions you are able to legally claim.
“Many small-sized business owners aren’t aware of deductions and are losing the money that could be saved each calendar year.” explained Gary Milkwick who is chief product officer at 1-800Accountant.
Milkwick identified some among the more frequently used business expenses that owners can deduct on their taxes:
Costs and the mileage for personal vehicles utilized for business purposes.
Phone bills for cell phones can be a problem if the phones are mostly used for business purposes.
Costs of running a business at home, for example some of your mortgage rent, utilities or even your mortgage
50% of the meal and entertainment expenses for existing or future employees, partners and contractors and customers
Costs for purchasing equipment for businesses, such as printers, computers, monitors and phones
The process of setting up and contributing to retirement savings plans
2. Make wise purchases and investment.
If you’re planning to purchase the latest equipment and services for your company the timing of these purchases could impact the tax burden in the coming year or even next year According to Milkwick. In January, start planning out what you’re going to invest in prior to the closing of the fiscal year.
“If it’s November and you’re planning to purchase equipment in the coming months for the expansion of your business for instance, it might be beneficial to accelerate purchasing … prior to the closing date of the year in order for tax benefits during the current fiscal year,” Milkwick told Business News Daily. “[Thesame is true for services. If you’re at the close of the year and you’re planning major marketing campaigns over the next few months, it might be beneficial to pay in advance for some part of your expenses to deduct the cost during the current year.”
Do you have extra money to invest in bigger projects? Consider tax-friendly options. For instance, you could write off a large portion of the initial investment you make in real property and oil and gas according to Casey Minshew, CEO of EnergyFunders.
“Oil and gas investments that traverse ‘intangible drilling costs’ help reduce an investor’s tax-deductible income since they can use these expenses as deductions active against the income they earn,” Minshew said. “This can yield 30% solely on tax benefits without even the first drop of oil has been extracted.”
Some business owners believe that all cash flows are tax-deductible and the cash flows qualify as deductions, Milkwick said. Actually, the character of cash flow or outflow determines whether it is tax-deductible or not.
In other words, he explained that the income earned from the sale of goods or services can be tax deductible. In contrast, some common cash increases that aren’t tax-deductible to the company are the loan from a bank, lines of credit and loans made by owners to company.
“These loans are also not tax-deductible for the business owner until the company invests the money,” Milkwick added.
If you’re unsure if you are able to or should utilize any tax deduction strategy ask your tax professional as well as a Certified Public Accountant (CPA).
3. Make sure you invest in your employees.
One of the best methods to decrease your tax-deductible income is to invest the funds back into your business particularly your employees. This can reduce the burden of tax while providing your employees with better odds of success.
Generally speaking, the salary and bonuses, wages and other forms of compensation you pay employees in an individual year can be tax-deductible as that they meet the following requirements:
- The compensation is normal and required.
- They’re reasonable.
- They had to pay for services that were not actually offered.
- They were repaid for or incurred during this year’s.
In investing in your business by hiring competent employees could help reduce the tax burden for you, but the retirement contributions of employees are also tax-deductible for employers. As per the IRS Employers can take deductions for 401(k) contributions so provided they don’t exceed the limit set by section 404 in the Internal Revenue Code.
Employers who match profits-sharing, or safe harbor contributions is a fantastic way to increase their morale, attract best talent and increase the size of your company as studies have shown that happier employees are more productive .
The key takeaway is to reduce your tax-deductible earnings by learning about credits and deductions and credits, making tax-efficient investments and put money into your staff.
Do not be a victim of an audit.
Although it’s financially sensible to look at all possibilities for cutting down on your tax bill but you should be aware. If your deductions appear suspect to the IRS and the agency, they could examine your business.
The IRS has changed its attention away from big corporations to smaller business entities, such as LLCs, sole proprietors, partnership and S corporation, according to Jessie Seaman, former senior managing attorney at Tax Defense Network. That’s right, Seaman said, your business may be subject to more scrutiny than your biggest rivals are.
Seaman pointed out that Seaman noted that the IRS generally seeks for specific types of tax deductions for businesses for example, deductions for the home office; food, travel, and entertainment, vehicles; and losses on real estate – to ensure tax payers adhere to the rules and rules.
In the same way, Steven Aldrich, former chief product officer at GoDaddy and an ex- CEO of the online accounting software Outright, warned business owners to keep their personal and business expenses apart. (The IRS looks for personal expenses that are reported as business expenses, he added.) Be sure to report the full gross income before costs, such as those for processing credit cards are deducted He said.
If you are given an audit notification, make sure you read Business News Daily’s guide for managing an audit in a professional manner. You should then consult with your tax advisor for what next to do.
The most important thing to remember is to reduce the chance of being scrutinized by refraining from combining your personal and business expenses or making massive deductions.
What can I do to reduce my tax liability?
One of the most effective methods to minimize your tax liability is to be aware of tax credits and tax deductions.
In contrast to tax deductions, which lower your tax deductible income, tax credits are taken out of taxes. Instead of decreasing the amount you owe tax upon, the tax credits offer an amount of reduction in the tax you have to pay. There are a variety of tax credits offered by the federal government for companies, including the general credit for business, the investment credit as well as credit for employers who provide childcare and facilities as well as and the Indian tax credit for employment and many more.
In some situations, you might realize that your business is qualified for greater in tax credit than it could legally claim in the year. In such cases you have the option of doing either of the following:
Use the tax credit for the previous tax year when you didn’t overspend your credit limit in order to get a retroactive refund.
You can carry the balance forward and transfer them into the following tax year.
Numerous states offer tax credit to stimulate economic expansion and investment in businesses. The tax credits vary from state the state, and many are offered for businesses that boost employment and use local resources or are located in cities that are not developed and regions. The treasury department of your state or chamber of commerce can provide complete information about the local and local tax credit that are offered.
A lot of businesses track their deductions in a meticulous manner, but they fail to research all tax credits that could be offered to them. To make sure you minimize the tax burden of your business to the maximum extent possible collaborate closely with your tax professional to ensure that you’re taking every tax deduction that will help your business.
Important takeaway: securing tax credits could lower your tax burden overall. Take a look at credits for general businesses and credit for investment to get started.
Which is the best tax treatment of donations to charities?
People who make charitable donations can deduct these contributions as much as 60 percent of their adjusted gross income, provided they detail the deductions on their income tax returns. Taxpayers who opt for the standard deduction are not able to take charitable contributions into account.
Corporations are able to take charitable donations in certain amounts however they are not able to be able to deduct more than 10 percent of their income before tax at any time. Contributions that exceed the limit can be carried over for as long as five years. The manner in which your contributions are handled could also vary based on the kind of contribution you made for example, money, property or shares of stock.
Certain charitable donations also are considered business expenses. If your company was offered a gain from the donation for this donation like ad space or event sponsorship, the contribution could be considered to be an expense for business.
Important takeaway: Charitable donations can be tax-deductible, however corporations are not able to deduct more than 10 percent of their pretax earnings within the same fiscal year. Certain charitable contributions may also considered business expense.
What is the definition of a tax-exempt business?
Tax-exempt companies do not have the obligation to pay Federal income tax however, they may be required to pay tax on state and local taxes on income. In order to be eligible for tax-exempt status owners and the founders of a company are not allowed to earn profits from the company.
Many organizations may be tax-exempt. However, they typically fall under one of the nine categories:
- Religion (such as synagogues or churches)
- Culture and arts (such like art galleries)
- Education (such as schools as well as parent-teacher organizations)
- Social benefit for the public (such such as Gates Foundation or United Way)
- Health (such as non-profit hospitals as well as cancer societies)
- Human service (such such as shelters for homeless, or Girl Scouts) Girl Scouts)
- The Environment (such such as the human society or foundations of environmental)
- Foreign or international affairs (such such as International Committee of the Red Cross)
- Membership-based organisations (such such as veteran’s groups as well as labor unions)