How to Cut Down on Next Year’s Tax Bill, Starting Now
Anyone will tell you that filing taxes is complicated in the best of scenarios, but that complexity is compounded when you’re operating a small business. The average effective tax rate for small businesses — before taking specifics into account — is currently 19.8%. But in an ever-changing tax landscape, managing your business’ taxes can feel a lot like stepping into a minefield.
“It’s crucial, especially in small business, to stay on top of your taxes,” says Gene Marks, CPA and president of The Marks Group. “There are steps you can take now to reduce that strain for the future.”
Here are some reasons why taxes are so integral to running a successful business, and how you can navigate them with ease.
Planning Taxes Saves Money — and Anticipates the Future
From a practical standpoint, planning ahead on taxes saves your business money. “People tend to ignore tax concerns because it’s boring and complicated,” Marks says. Taxes are often a small business’ biggest expense, extracting 20-30% of annual income, so planning ahead is an important step in minimizing that.
On a deeper level though, planning ahead on taxes is a mindset that can help get your business where you want it to be. Mimicking the tax habits of large corporations is an important tool for growth. “Young companies should have the attitude of treating taxes with the formality that they deserve,” Marks says. “That’s what growing companies do.”
It’s Never Too Early to Prepare
It may seem like tax season just ended, but June is exactly the time to start planning for next year. Now is the optimal time to talk to your CPA about which credits you can take advantage of — and you have enough time to make that happen. If you don’t have a CPA on staff, consider investing in one. You’ll save money in the long run.
Take a look at your tax structure. There is a lot of confusion surrounding LLCs and S corporations. You should be able to sit down with your CPA and confirm that your business is filing appropriately and being taxed correctly.
Know Which Credits Are Right for You
There are a number of tax credits that you probably aren’t taking advantage of — or are even aware of. A lot of tech startups qualify for the research and development tax credit but jump on this now, Marks says, because it requires a lot of documentation. A more common credit comes from offering your employees retirement plans. This applies to any business with fewer than 100 employees, and it offers a three-year return.
The work opportunity tax credit encourages unconventional staffing and gives you a great return. By employing individuals who have been unemployed for some time or who face barriers to employment — former inmates, individuals weaning off of welfare, veterans — you can receive a credit of nearly $10,000, which Marks recommends investing in that employee.