If you own a business, especially a small or mid-size one, you’re probably concerned about money. That means you’re doing whatever you can to increase sales and boost profits, everything from investing in a website to slogging through the complexities of social media and content marketing. But are you also do everything you can to lower costs? For example, have you taken the time to investigate all the savings you could realize by implementing a smart tax planning strategy? If not, you could be missing substantial savings.
First, Get the Basic Lingo Down
You don’t need to have an encyclopedic knowledge of the way federal taxes work, or of all the relevant terminology. That’s why you use competent accounting services. You should, however, take the time to get a fundamental grasp of how taxes work (doing so will make conversations with your accountant more meaningful), and that begins by understanding that tax deductions and tax credits, though both will save you money, are not the same thing.
Here’s how Money Crashers explains the difference between deductions and credits:
“Both deductions and credits lower your tax bill, but they work in different ways. Deductions reduce your taxable income, while credits lower your tax liability. For example, if you’re the 25% tax bracket and you have a $100 deduction, that deduction will save you $25 in taxes (25% of $100). However, if you have a $100 tax credit, it will save you $100 in taxes. That’s what tax pros mean when they say tax credits are a dollar-for-dollar reduction in your tax liability.”
In other words, whereas a deduction will reduce the amount of your taxable income, you subtract tax credits from the amount of tax you owe. If you owe $20,000 and receive a $5,000 tax credit, you pay the IRS just $15,000. In this sense, tax credits will generally save you more money than tax deductions.
How Can I Take Advantage of Tax Credits?
First, you’ll need to get the appropriate credit forms, and you’ll probably need to file Form 3800 as well. More importantly, you’ll need to adjust your business practices to be able to take advantage of as many tax credits as feasible — and there a lot of them, everything from the general business credit to credits for work opportunity, recapture of low income housing, electric vehicles and Indian employment.
However, the most popular tax credits — and the ones more likely applicable to your business, include these 4:
1. Give your employees paid family and medical leave: if you offer eligible employees 2 weeks of paid leave per year (not including time for sickness or vacations), the IRS will cover 12.5% of those employees' benefits, assuming you pay half of their regular salary. That increases to 25% of benefit costs if you pay their full salaries for those 2 weeks. You can’t take advantage of this tax credit if local legislation requires you to offer this benefit, and at this point it’s only applicable to the 2019 tax year.
2. Go green: if your business buys more energy efficient equipment, the federal government will reward you with a tax credit. Currently, that amounts to 10% of what you paid for that equipment.
3. Make your business accessible to disabled people: providing greater access for the disabled could make you eligible for the Disabled Access Tax Credit. There's a related credit, the Work Opportunity Tax Credit which saves you as much as $9,600 depending on whom you hire and how long that person works for you.
4. Give your employees health insurance: if yours is a small business (with no more than 25 full-time employees), you can get a tax credit amounting to half of what you pay for the health insurance premiums. To be eligible, you must be covering at least 50% of those premiums.
What about Tax Deductions?
Again, it’s critically important to check with your accountant, because the rules governing business tax deductions are often complex and frequently confusing. That said, anything you deduct, according to the IRS, must be both “ordinary and necessary.” “Ordinary” means the expense is something that’s common in your business; “necessary” means the expense is helpful and appropriate for businesses like yours.
Although those terms might seem restrictive, in fact there are many business deductions available to small and mid-size business owners, including the following 6:
1. Business vehicle operating expenses: If you use cars or trucks for your business and can establish with appropriate records (like gas receipts) that you used them for that purpose, you can get a deduction. The easiest way to do that is to take the standard mileage deduction, which is 58 cents a mile for 2019.
2. Employee salaries: Yes, the wages you pay your employees are deductible. This includes both bonuses and fringe benefits. You can’t deduct what you pay “sole proprietors” or members of LLCs, but you can deduct payments to independent contractors.
3. Repairs: “Ordinary repairs and maintenance” costs are deductible. Typically, however, any costs that add to the value of your business property would normally be capitalized, in which case you can recover those costs through the deprecation deduction (check with your accountant for details).
4. Business taxes: You can deduct the cost of taxes you pay for real estate, as well as the amount you pay for FICA, state unemployment and regulatory fees.
5. Use of a home office: If you conduct your business out of your home, you can deduct many expenses, including the costs for your mortgage or rent, as well as for utilities. If your office takes of 10% of your home’s total square footage, for example, you can deduct 10% of those costs, as well as the cost of insurance for your home and property taxes.
6. Capital expenses: These are costs related to the investments you make in your business — your business assets, in other words. This would include things like startup costs and the cost for improvements you make.
This is just scratching the surface of the many things you can do during the year to realize tax savings at year’s end. Admittedly, tax planning can be frustrating, and at times downright confusing. At those times you need to partner with tax planning experts who can give you the advice and guidance you need. To learn more about the ways our accounting, payroll and benefits services can increase your profitability, contact us today.
Platinum Group is a full service human capital management (HCM) resource that allows businesses to manage their payroll, benefits compliance, track time and attendance and other various human resources functions in a way that maximizes efficiency and eliminates redundancies with the platform, iSolved. For more information about Platinum Group or to schedule a demo of iSolved please visit our website.