Tax planning is a set of measures a legal entity takes to reduce the tax amount it pays. You can do it at the stage of business registration to plan the tax burden from the start. Even if you are just an individual entrepreneur or a sole proprietor, tax planning is important for building a business.
A business can minimize tax payments by carefully planning and structuring its financial transactions. This allows you to save more funds for the company’s development or investments in new projects. Regardless of the company’s income, the ability to reduce the tax burden is a significant and legal bonus. Why not use it?
Please keep in mind that we are talking about tax avoidance (legal), not tax evasion (illegal). I will mention the legal ways for small businesses to save taxes.
Planning the structure of your business to minimize taxes
Not all small businesses are the same, and so there is no one-size-fits-all tax filing form or set tax rate. Your business’s profitability and business structure determine how and how much you pay in taxes.
Following the Tax Cuts and Jobs Act, C corporations have paid taxes at a 21% rate since 2018. Pass-through entities like sole proprietorships, partnerships, and S corporations pay taxes at the owner’s tax rate, which ranges from 10 to 37 percent. LLCs can choose to pay their taxes as a pass-through entity or as a corporation.
Most of the businesses in the US are “pass-through”, and don’t pay their federal taxes directly. The owners and the members of these companies pay taxes via individual tax returns for business profit.
| Rate | Individual filing | Joint filing by married couples |
|---|---|---|
| 12% | For incomes over $11,600 | More than $23,200 |
| 22% | For incomes over $47,150 | More than $94,300 |
| 24% | For incomes over $100,525 | More than $201,050 |
| 32% | For incomes over $191,950 | More than $383,900 |
| 35% | For incomes over $243,725 | More than $487,450 |
You may be tempted to pay taxes as a C-corp, because you see that they only pay 21% in taxes, and tax rates for individuals are higher, up to 35-37%. However, you may be eligible for a 20% business tax deduction if your income is $182,100 (or $364,000 for married couples filing jointly) or less.
I have prepared a list of the qualified business expense deductions that help you maximize your tax write-offs.
Small business deductions that you can use to maximize tax write-offs
You can maximize your tax write-offs by recording necessary expenses. Everyday expenses like business supplies, gas costs, utilities, and travel expenses are tax write-offs. Not just these, you can also record expenses like rent, advertising, and employee salaries. Long-term depreciating assets can also be written off in multiple years. This is a long list, and I have just listed a few of them here for you.
1. Office Supplies
IRS allows you to record ordinary, and necessary items that your business needs on a day-to-day basis as deductible. Office supplies like pens, paper, printers, ink, and business cards, are just a few to name. If an item is deemed necessary in your business niche, it can be recorded as a business expense. Do keep in mind that these are the items that get used within the same financial year. Items with longer anticipated lifespans should be recorded as depreciating assets.
2. Utility bills, phone, and internet
You can deduct 100% of the electricity, gas, trash, and water bills if your business owns or rents a dedicated brick-and-mortar office or space. You can also deduct phone and internet bills.
However, if you are using your home as an office, you can only deduct the amount that you are using specifically for your business. You can deduct rent for a specific room exclusively used for an office, or secondary landline, and charges for a percentage of internet used for your business. Primary landline bills are not deductible. Also, you can’t deduct utility bills if you use your home as an office.
3. Softwares Subscriptions, electronics, online apps & tools cost
You can’t do without software and apps like Microsoft Office 365, and accounting software when you run a small business. Since these add to your business operating costs, you can write these subscriptions off. You can also write off tools like Canva, HootSuite, and Adobe Suite as these have become an essential part of marketing needs.
4. Marketing, Advertising, SEO, and freelancers
Whatever that lets people know about your business can be considered a marketing channel. It can be word of mouth, digital ads, billboards, sending postcards to potential customers, SEO, and hiring a freelancer to manage all of it for you, are all deductible. As long as it is to increase your customer base, it is deductible.
5. Business travelling expense
Whenever you take a taxi or fly to meet a client for some sort of discussion or to go to a training center, you can deduct these as business expenses. If you use a vehicle owned by you or your business, then it is recorded differently. I have mentioned that later in this article.
6. Professional services and hires
If you hire a legal adviser, a bookkeeper, an accountant, a business coach, or a certified professional in any field, whatever you have paid them is typically deductible. So, if you happen to need a professional bookkeeper for your small business, reach out to us…😁
Do you need a bookkeeper for your business? Let us at absorb assets help you!
7. Vehicle costs, gas charges, insurance premiums
If you have a vehicle that you drive for business purposes only, then you can deduct all the auto charges, but if you use your vehicle for both personal and business use, there are two ways in which you can record the expense for deductions. Only the expenses incurred for the business are deductible, and you can only choose one method for the rest of the lifetime of the vehicle.
Actual expenses: You record the percentage of the vehicle used for your business and then multiply it by the total cost of insurance, gas, repairs, and interest paid (applicable only if you took an auto loan). You have to keep track of the business trips, and total miles traveled.
Standard mileage: The IRS maintains standard mileage rates. All you have to do is keep track of the miles traveled for business purposes and then multiply it by the standard mileage rates. You can find it here on The IRS Website: Standard mileage rates.
8. Employee Fringe benefits
You can claim deductions for benefits that you provide to your employees. These include solo 401(k), health and life insurance premiums, gifts (25 USD max/employee/year), etcetera.
9. Bad Debt
If you make a sale on a credit basis, and the client/customer fails to pay, this can be considered a bad debt, and you can deduct it from tax filings. IRS gives examples of such bad debts as:
- Credit based sale to customer
- Loan given to clients, employees, distributors, or suppliers
- Business loan guarantees
10. Employee’s salaries, freelancers, and contracted labor
Anything, and everything that you pay to your employees, salary, commissions, bonuses, non-cash compensation, or otherwise is fully deductible. It doesn’t matter if they are full-time or part-time employees. You can also file for deductions using the 1099-NEC form for non-employees (contracted, or freelance workers) who have earned more than 600 USD in a fiscal year.
Conclusion
In conclusion, there are many opportunities to save taxes legally. You just need to have a thorough understanding of eligible deductions. Structure your business properly, track your expenses, and be informed about qualified deductions, and you will be able to do proper tax planning, save some funds, and then use those funds to grow your business.