If you are running a business that is earning a profit this year, you are probably pretty happy. After all, being profitable means you have created a successful entity and are doing very well. But you aren’t the only one excited about the performance of your business.
Owning and operating a profitable business means having to pay taxes. And no one likes your tax dollars more than the IRS. No one that is except you.
So unless you like the idea of the IRS doing a Scrooge McDuck dive into the tax dollars you have to pay out, it’s in your financial interest to take advantage of the tax breaks that reduce the amount your business owes.
Tax credits vs tax deductions
While both tax credits and tax deductions can help minimize a company’s income tax liability, there are differences between the two. Tax credits are 1:1 reduction of taxes whereas tax deductions are a percentage of dollar spent based on the tax rates and cut your taxable income.
Tax credits your businesses may be able to take advantage of:
Work Opportunity Tax Credit (WOTC)
If your business has hired military veterans, long-term unemployed individuals, or other targeted groups, your company could be eligible to take advantage of this tax credit. This tax credit has been extended until 2019.
Federal Research and Design Tax Credit
Your business may be performing R&D qualifying activities without you realizing it. The R&D credit (not to mistaken with the R&D Tax Deduction) is a 1:1 reduction against taxes owed or paid.
Nearly every state also has their own R&D credit programs, most resembling federal rules and come in varying incentive amounts. So if your company is developing new or improved products or technologies, you could qualify for substantial tax savings.
Alternative Motor Vehicle Credit
If your business has purchased vehicles with fuel cells (e.g., electric cars that use fuel cells with, or in lieu of, a battery), you could qualify for this tax credit. Many of these credits have been reduced, with phase-out rules depending on the vehicle’s model and year. So even if your business has purchased alternative fuel vehicles, automatic eligibility for this credit is not guaranteed.
Like tax credits, there are various tax deductions available for small and midsize businesses to claim. The key is to research which ones your business is eligible, to ensure you take full advantage of them.
Tax deductions help lower potential profits and can reduce your taxable liability. These activities can be anything from purchasing new assets or having various benefits to offer employees.
Tax deductions your business could be able to take advantage of:
Employee benefit programs and retirement contributions
Setting up your employees with retirement accounts is a great way to maximize tax savings for your company. Other qualifying employee benefits include education assistance and dependent care assistance programs.
Make charitable contributions
Any individual or company can make a charitable contribution, but there may be limitations on these deductions under the new Tax Cuts and Jobs Act (TCJA). Your business can still deduct cash contributions and gifts, but can no longer deduct the time spent volunteering.
Hire contract (or fractional) employees
If your company hires contract labor (1099 employees), this cost could be deductible for your business.
Not only can contract, or fractional employees, reduce your tax liability, it can also reduce overhead costs for things like payroll, benefits, training, and other additional employee expenses. Hiring fractional employees also offers your company flexibility and greater cost control during slow months or ramping up staff during times of growth.
Save by spending
The cost of business-related supplies such as new equipment, software, and technologies, or furniture for the office, are deductible expenses that can reduce your company’s tax liability.
Business interest expenses
If your business makes a profit, there are expenses you may be able to write off. In order for an expense to qualify as a deductible, your business expenses must be ordinary and necessary, as defined by the IRS. Meaning, if the expense applies directly to running your business, it may be ordinary and necessary. In any case, it’s best to save your receipts for every expense you deduct on your taxes.
As a business owner, it benefits you to see what you can do to reduce your potential tax liability now instead of waiting until the end of the year when it may be too late to do anything. For instance, how much money will your company bring in at the beginning of the year? Forecasting can help your company develop a tentative plan to maximize your expenses, which can be adjusted as the year progresses.
Your taxes can make a severe financial impact on your business. Contact us today to find out how our services can help your team reduce your tax liability.