Owing taxes indicates a certain level of business success—after all, you have to earn income to be taxed in the first place. But a small business’s income tax burden can interfere with other plans your company may have to invest and grow.
An exploration into how to reduce tax liability for a small business often begins with deductions. Proactive, strategic tax planning can help small business owners optimize deductions in ways that actually strengthen the company’s competitive advantages.
Be sure to consult with your trusted tax professional to choose the most appropriate and effective tax strategies for you and your business.
And before your next consultation, take a closer look at these options for reducing your business tax liability.
1. Invest More in Marketing & Deduct the Expenses
Marketing expenses can be tax deductible while also promoting your business and helping grow your customer base. How long has it been since you’ve updated your website or company social media strategies? Is attending a conference or trade show in your best interest? Take a closer look at your current marketing plan to see what could use more attention — and consult with your tax expert about deductions to reduce business tax liabilities.
2. Speaking of Experts…
Company spending on professional services like bookkeeping and tax preparation can be substantial, but it can also be deductible. Consider all the areas where you consult with experts: business coaching, human resources administration, payroll services, legal, etc. When these expenses are deducted from business income and lower your tax liability, it improves the overall ROI of using professional services.
3. Track Business Travel Expenses for Deductions
Business travel can be costly, but thankfully, it’s typically deductible. What’s important is to make sure you and your employees track and document expenses diligently, and save those receipts. The tax deduction can take some of the sting out of the price at the gas pump, airline ticket counter, and hotel.
4. Tax-Deductible Insurance Premiums
Health insurance premiums are tax-deductible. So are other business-related insurance policy premiums like property coverage, as well as policies for issues like liability, workers’ compensation, errors and omissions, and malpractice. It’s just good business sense to ensure proper coverage for all contingencies. The tax deductibility makes it virtually a no-brainer to take a closer look at all areas of insurance coverage for your business.
5. Deductions for Taxes and Licensing or Certifications
Wait…taxes are tax-deductible? It turns out they certainly can be. If taxes, such as property taxes paid on facilities you own, and/or licensing fees are required for your business to operate, those costs may be tax-deductible. The same goes for required licensing or professional certifications.
6. Make Charitable Contributions
Companies can typically deduct a percentage of taxable income in charitable donations. Business owners might consider choosing charities or nonprofits that align with their business mission and/or employee values, as well.
7. Revisit Employee Compensation
The investment you make in your company staff not only pays off in tax liability reductions; offering competitive compensation can help you attract and retain high quality employees. Generally, employee wages, salaries, bonuses, and other compensation are deductible as long as they are:
- Deemed ordinary and reasonable
- Paid out in the current tax year
- Paid for work that’s actually performed
8. Optimize Your Business Structure
Your business’s legal structure can have an important impact on your income tax liabilities. The right structure for your business offers the right balance of personal liability protection and tax liability. Every corporate organizational structure has its pros and cons, so it’s smart to consult with an expert before making the decision to convert your business.
Choosing between C corporation and S corporation can impact not only taxation, but also federal tax deadlines. And while an S corp may turn out to be more beneficial, it could also be more complex to prepare your business taxes as a result.
9. Deductible Retirement Plan Contributions
If you're digging deeper into how to reduce taxes for your small business, consider your employee retirement benefits. Retirement plans can be a smart, flexible strategy for offering valuable employee benefits and reducing income tax liabilities. Plans like SEP plans, SIMPLE plans, and qualified plans offer ways for small businesses to make tax-deductible contributions to employee retirement accounts. Some plans allow employees to make salary reduction contributions, helping to reduce their individual income tax liability as well — making retirement plans a smart consideration.
An employee stock ownership plan (ESOP) is a specific type of qualified retirement plan that can have a tremendous impact on corporate tax liabilities. For owners of closely held, private companies, an ESOP can also provide a flexible exit strategy and a way to diversify small business wealth. In fact, 100% ESOP-owned S corporations currently pay no federal income tax.
Becoming an ESOP can do a lot more than reduce tax liabilities—though that is a major benefit. By reducing corporate tax bills, the business can improve free cash flow and invest in growth strategies. But that’s not all. Retirement benefits can boost employee morale, and employee ownership can have long-lasting cultural benefits that can improve productivity, customer service, and efficiency over the long term.
ESOPs take planning and commitment, but the business advantages they can provide are worth investigating. Find out if your company is a good fit for employee ownership with an ESOP. Click the link below to take a quick and easy quiz.