| Tax Savings |
Overview | There are many different kinds of business income, and almost all of them are taxable. Just as the IRS taxes individuals' income, such as income from a job, it also taxes the income a business brings in. And, in the same way that an individual can lower his or her taxable income through credits and deductions, so can a business. You can reduce your tax burden by deducting most of what you spend in the course of a business. The tax code allows you to deduct costs of doing business from your gross income. What you are left with is your net business profit, which is the amount that gets taxed. Knowing how to maximize your deductible business expenses will help you lower your taxable profit. Tax rules cover not only what expenses can be deducted but also when--what year--they can be deducted. Some types of expenditures are deductible in the year they are incurred but others must be taken over a number of future years. The first category is called "current" expenses, and the second " capitalized" expenditures. |
Business Entity | The form of business organization you choose determines whether your business income is taxed at the corporate entity level or at the business owner level. Electing S corporation status, which shield owners from personal liability and gives them the tax status of partners rather than shareholders, can be advantageous. However, the decision on whether to incorporate should be based on several factors, including liability issues, investor needs, succession planning, and the need to retain earnings for reinvestment in equipment and inventory. |
Additional Deductions & Credits | In addition to the items listed above, there are numerous ways to reduce your taxable income through credits and deductions. Tax credits are generally more advantageous than tax deductions, because credits are subtracted from your tax bill, while deductions are subtracted from the income on which your tax bill is computed. Additional credits and deductions to consider include: establishing a profit sharing plan for employees, establishing an employee pension plan, arranging for health insurance coverage, changing accounting methods, making charitable contributions and hiring your children. Implementing these strategies and others will put you on course for minimizing your tax bill. However, if you want to ensure that you are consistently managing your business in a tax-smart way, be sure to make tax planning a year-round activity and seek guidance to steer you in the right direction. |