As you grow your business and expand into new markets, you must manage your expenses properly. Unfortunately, business owners often think they can get away with spending more money on marketing and advertising than on their business operations.
However, this is not the right approach.
Tax rules and regulations can sometimes feel like a black hole when attempting to understand deductibles. Even if you have plenty of time to study every rule, some deductions may appeal more than others.
This is where tax law becomes tricky — especially when it comes to reducing your tax burden. Reducing taxes does not have to be complicated, but the many variables can make it seem like it is.
Below, we answer some common questions on how reducing taxes affects your business and how to structure your deductions. You’ll learn to reduce your taxes in a financially beneficial way.
So read on!
What Is the Tax Code?
The Internal Revenue Code is the official statute book for the U.S. Federal Government. It consists of over 2,000 pages and regulates almost every aspect of U.S. life.
The tax code is complicated, to put it mildly, and it can feel like an appellate court decision when trying to understand how your business is taxed. However, there are some basic rules that all companies need to know to avoid fraudulent activity, comply with the law, and avoid having their taxes eaten away by the I.R.S.
Businesses can choose from many types of taxes when filing their annual returns. These include:
- Payroll taxes
- Income taxes
- Profit (E.G.P.) taxes
How to Structure Your Deductions
When it comes time to figure out the total amount of your deductions, you have three main choices. You can structure them all simultaneously or in a different order.
If you choose to structure them all simultaneously, you’ll want to ensure that your accountant is on board with the idea.
First, let’s look at how you structure your income taxes.
Most businesses will report their income on a fictitious income tax return. You’ll use this return to report your income without taking any deductions.
It is important to remember that business expenses can significantly reduce your taxable income. It’s critical to keep these expenses in mind as you start to design your deductions.
Invest in Tax-Advantaged Accounts
Some deductions, such as the state and local income tax, are better off as investments. Since states and localities rarely pay, franchise tax will pay out an extensive refund check; this is one of the best investments you can make.
Some industries will benefit more from the tax code’s generosity than others. Capital gains are a great example. Certain tax breaks will let you defer taxes on that gain until you sell the assets if you have a large amount of capital gain income.
Review Your Deductions Regularly
After you’ve structured your deductions to fit your financial situation best, it’s time to review them to ensure you haven’t overlooked anything.
Every year, most people will discover that they have underreported their income or failed to report any form of income. The I.R.S. recommends you review your deductions with your accountant to ensure you haven’t missed anything.
If you’re still unhappy with your deductions, you can always file a tax return for the following year and change your mind later.
Stay Organized and Keep Good Records
Keeping concise records is a must when it comes to tax deductions. You must keep track of your deductions on a spreadsheet, including what they were for and their value.
While it may seem like a daunting task to keep track of each expense and deduction you have, it’s pretty easy once you get started. Regularly keeping track of your expenses can help you stay on top of what you need to report and enables you to stay on task.
In addition, keeping track of your deductions will make it much easier to identify any potential problems in your business that may need to be corrected to help lower taxes.
Understand the Tax Code Thoroughly
Knowing the tax code can be difficult. That’s why we’ve made it more accessible. We’ve broken down the code into easy-to-understand categories to make it a little easier to understand your specific situation.
We highly recommend you speak with a tax professional about your finances for a free analysis. A professional can help you sort through your deductions and tell you where you have a tax issue.
Meet with an Experienced Tax Professional
If you have any questions or issues regarding your taxes, it’s a good idea to get them addressed before you begin your return. Meet with a tax professional to go over your options and help you make sure you don’t miss out on any deductions.
This can be a legal advisor, accountant, or tax attorney. Find a financial firm you trust and whose expertise you can draw on going forward.
Reducing Taxes for Your Business
In the end, just like with any other aspect of business, the more you know about reducing taxes, the better.
There are many ways to reduce taxes, and knowing which deductions will benefit you the most can be challenging. We recommend contacting a financial expert and allowing them to help you get the most out of your business finances.
Schedule a free consultation with Bennett Financials, and let us help you get your business or personal finances in order.