Taxes for small businesses can be rather confusing. Owners are likely to have a question or two about how to tackle them. For instance, what actually qualifies as a business expense? Or, what portion of those expenses are they allowed to deduct?
Business owners should always invest in audit defense, just in case the IRS decides it wants to take a closer look. That helps to protect their pocketbook from an unwanted fine. Also, it's a good idea to learn how to reduce the business' tax debt, overall. That's because it's very important for entrepreneurs to squeeze savings out of every dollar.
1. Get To Know the Business' AGI and MAGI
Many types of tax breaks, additional taxes, and limitations are based on the company's adjusted gross income (AGI) or its modified adjusted gross income (MAGI). The former is the gross income after all of the eligible adjustments have been subtracted. The MAGI is the AGI after factoring in tax penalties and other deductions.
Business owners need to know this because it can help them figure out what deductions they qualify for. For example, they can avoid almost a full percent of the Medicare tax on their earned income as long as the AGI doesn't reach $200,000.
2. Create Accountable Plans for Reimbursement
There will be times when a business owner might need to reimburse an employee or two for expenses like travel, tools, or entertainment. Before doing that, it's important to ensure that they're using a plan for paying the worker back that meets IRS requirements. Those are known as accountable plans.
With an accountable plan, the business owner will be able to deduct certain expenses while not reporting those payments as employee income. That can save the business money when it comes to employment taxes while also lowering the taxable income.
Under new tax regulations, employees aren't able to deduct their miscellaneous employee expenses that aren't repaid. Getting an accountable plan for reimbursement can mean that both the business and employees save money when it comes to taxes.
3. Tax-Free Methods of Extracting Income
When it comes to the financial health of the business, owners need to know that bonuses, salaries, and distributions of their share of the profits from the business are all taxable.
At the same time, there are methods where entrepreneurs are able to make a profit from their business while not triggering taxes. They should have a conversation with their accountant about fringe benefits that are free from taxes. These might include things like medical coverage, retirement plans, and health savings accounts. They may also be able to take advantage of a loan from their business that comes with no or low interest rates. If this interest happens to be lower than rates set by the IRS, the company may need to report any that's accrued. However, since rates these days tend to be low, this may not be overly costly.
When business owners think about how to save on taxes for their company, they may be able to reduce the amount they have to pay by taking advantage of things like tax breaks and other opportunities that might be out there. It's definitely worth having a conversation with their accountant about. It's the business owner and tax advisor's responsibility to discover if they'll be able to use tax strategies in order to reduce what they have to pay the IRS. Whatever moves they decide to make now might be able to save the business a significant amount of money both now and for years to come, thus contributing to the health of the company.
