5 Strategies to Reduce Taxes for Small Business Owners

SB 1343
Senate Bill 1343 – California’s Sexual Harassment Training Compliance Update
November 27, 2018

As a small business owner, it can be difficult to keep your tax spending in check. Fortunately, there are some simple ways to reduce your taxes, ultimately saving you money and improving your business’s bottom line. Here are 5 strategies to reduce taxes for small business owners.

#1 Offer your employees fringe benefits.

Higher wage rates for employees come with higher tax bills for businesses. However, by offering additional benefits rather than increasing wages, companies can reward their employees for good work without increasing their tax liability. There are several tax-exempt fringe benefits that you can give to your employees:

  • Insurance
  • Transportation
  • In-office meals
  • Health coverage
  • Disability benefits
  • Child-care and dependent’s assistance

#2 Set up retirement plans.

The government offers incentives for individuals and businesses that save for retirement. As a business owner, you can set up a tax-exempt retirement plan, which encourages employees to save money for the future. The employees will not pay taxes on any contributions that they make to the plan, and the savings will grow on a tax-exempt basis. The contributions will only be taxable when the savings are withdrawn. By that time, the employee may be in a lower tax bracket.

Retirement plan options include a 401(k) or an IRA. Consult your accountant for advice on which type of plan best suits your business’s needs. Such plans allow you to shift the cost of the taxes onto the employees while giving them the option of having a convenient retirement plan. Employer contributions to the retirement plans are tax deductible, and you may qualify for a tax credit. Such plans are better for employers than pensions, where employers are responsible for much of the costs.

#3 Make smart buying decisions.

Several tax deductions are available for business owners who are smart about how they manage their business’s expenses. For example, the government will allow you to deduct the cost of buying startup equipment worth up to $1 million. If you spread the cost of buying these items over several years rather than paying for everything up front, you can make use of depreciation to pay less in taxes when the actual value of the item is lower. This allows you to deduct vehicle expenses according to the IRS mileage allowance and spread disaster losses across previous years’ returns rather than the year when the disaster struck.

You can also save money by deducting your insurance expenses. Small businesses can file for deductions from their liability insurance, commercial auto insurance, and business interruption service insurance. 

The IRS has strengthened its review process, which makes it more difficult for those trying to use these deductions to cheat the system. As a result, business owners with legitimate deductions may face scrutiny. Small businesses are advised to seek professional help in determining their deductions.

#4 Abandon assets instead of selling them.

Businesses tend to sell assets that are of no use to them. When the asset is sold at a loss, it is considered to be a capital loss, which does not have the tax-deductible flexibility of an abandoned asset listed as a fully deductible ordinary loss. The size of the deductible will depend on what type of asset it is.

#5 Adopt accountable plans.

Accountable plans are reports for employee reimbursements. If you plan on paying employees for the costs of travel, entertainment, or any other business-related costs, then you should do so as a reimbursement because the IRS will not consider reimbursement as a part of employee income. This saves money for both the business and the employee.

These are just a few of the many strategies available for small business owners to reduce their tax burden. For more information on how you can lower your tax rate as a small business owner, contact your tax advisor. If you are a small business owner in need of human resources services, benefits administration, or insurance, Mercado Insurance Services is here to help. Give us a call today.