4 Ways to Reduce Small Business Taxes

Business Tax Tips

And Then, There’s Taxes

There’s nothing more exciting that starting your own business. A professional and personal milestone, sustaining a business requires strong enthusiasm, will, and resilience.

And when the time comes that the fog of chaos from having to start one eventually clears, you will be able to enjoy its rewards.

But alas, business owners are not absolved from having to pay steep business taxes. Instead of fully reaping all monetary returns, you will be compelled to give a portion (at times more than what you are willing to) to the government.

Do not get us wrong though, the government sets these regulations in place to keep the national economy running smoothly while providing every citizen with their needs.

However, when you have already put effort into securing all the logistics and have entertained all clients regardless of temperament or taste, your business tax dues may be the least appealing thing that you would have to face afterwards.

There’s Good News

You need not fret. There are ways by which small business taxes can be reduced without having to resort to evasion or any other clandestine measures that will only put you in a compromising position.

And mind you, these are not mere workarounds or hacks—these are government approved solutions that any small business can look into.

Let us take a look at each of these tax solutions at length in the following discussions.

1. Employ a Relative

Probably the simplest of the solutions in the list, employing a family member, albeit just children, is something that the Internal Revenue Services (IRS) permits as a way for small businesses to shelter their income from taxes.

By employing family members, you would be given the chance to pay a lower marginal rate or even do away with the tax on income paid to your children.

This is especially notable when we are talking about Sole Proprietorships. Should you opt to hire your own child, it would not be necessary for you to pay for taxes for Medicare, social security, or even for the Federal Unemployment Tax Act (FUTA) tax.

But of course, you have to ensure that you are able to declare that the returns are generated by business purposes that are both sound and justifiable.

Hiring a spouse is also something the IRS recommends. Employing the services of your spouse means you need not pay for the FUTA tax.

2. Apply for a Retirement Plan

Should you opt to become a Small Businesses owner, one of the things that you are giving up is a 401(k) Plan.

However, there are still other retirement plans out there that you can avail as you enjoy tax benefits. You can choose from a variety of known plans.

Below are two of the more known ones for Small Business owners looking for effective strategies for saving taxes:

2.1. Simplified Employee Pension Plan (SEP)

Simplified Employee Pension Plan or simply (SEP) is a type of retirement plan for business owners that offer a simplified way of contributing to the retirement plan of their employees as well as their own.

2.2. Traditional Individual Retirement Arrangements (IRA)

An Individual Retirement Account (IRA) is a savings account that come with tax advantages. Individuals wanting to open an IRA may do so with the aim of saving and investing in the long term. For all intents and purposes, an IRA actually encourages people to save for their retirement.

Small business owners may open an IRA through a brokerage, an investment company, a bank, or even with a personal broker.

Should the owner choose the IRA to be a deductible, the contributions will decrease taxable income within the year it was filed. Depending on the income, these deductions can be phased out. The distribution for retirement will be taxed as ordinary income.

3. Declare Your Travel Expenses

Business taxes may actually be reduced by declaring business travel-related expenses. You can maximize this by combining it with personal travel made with a business purpose.

4. Look into QSBS Tax Exemption

Attractive in its provisions, the Qualified Small Business Stock (QSBS) tax exemption allows business owners to avert up to 100% of the capital gains taxes. This would only be possible provided you sell a stake from the business.

If you own a stake or at least planning into investing in a small business or a start up, the QSBS exclusion is a tax benefit that you would find largely beneficial.

On the onset, the exclusion promises business owners to be rid of federal taxes on capital gains.  The QSBS Exclusion is actually the summative name for the provision in Section 1202 of the Internal Revenue Code (IRC).

The section delineates the rules that allows small business owners be excluded from federal taxation. In its initial implementation back in 1993, it had a 50% limit. Recent updates have placed it to an impressive 100% gain exclusion.

Note that according to the provision, the exclusion is limited to $10 million or 10 times of what the initial investment, favoring which is higher. If it exceeds that, then you would not be able to exclude the gains federal taxation.

The prospect of QSBS Exemption can even be furthered through the gifting of shares to a Charitable Remainder Trust (CRT).

Through this, you can enjoy the CRT’s special offerings like the control of payouts and consistent tax free growth after selling of shares. The aim here is to distribute as much tax-free dollars throughout a short-term.

You can also double your QSBS Exemption by effectively giving a simple gift of shares to your relative. Should you choose to give away your qualifying shares, it would be possible for the one receiving it to pay no taxes on the initial $10 million gains.

To get an QSBS Exemption, you will need to ensure that you have held the stock for at least 5 years, that the stock was issued back in August of 1993, and that you are not a Corporate taxpayer.

Noteworthy Prospects

With these solutions available for Small Business owners, you do not have to wary of setting up your own business.

For what it’s worth, setting up even a small business will even open you to a myriad of benefits that you cannot otherwise experience from staying within the bounds of employment.

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