Austin Tax Blog


The highest expense for a small business over the year is not raw material, health insurance, or even payroll – but taxes. In this age of lower and friendlier tax rates, small businesses often have to grapple federal and local tax regulations. And before you know it, the amount accumulates to the point that it affects the foundation of your business.

Small business owners have come to realize the power of smart decisions. It’s those smart decisions that allow you to review your tax bills thoroughly. It’s those smart decisions that lead to meet qualified and competent accountants that can devise strategic tax plans on your behalf. As 2020 begins, small businesses should do their best to minimize the burden of taxes.

Here are some of the most effective tax strategies small businesses should explore and implement to gain tax savings and increase annual earnings:

Strategy No. 1: Purchase Capital Equipment

It is true – the federal and local governments fervently encourage your small business to invest. Though it depends on some elements, you shouldn’t hesitate to make the most out of it. An average small business should be able to expense annual capital expenditures of more than $1 million.

The expenditures could comprise a roof, new machinery, fire safety, alarm mechanism, an HVAC, or a security network. Small businesses can use different kinds of computer software and hardware to save the overall cost.

What about car depreciation? Well, you don’t necessarily need to pay immediately. So long as there are low-interest rates, you should be able to finance the machinery. The idea is to receive full deduction once you put the equipment into use at the end of the taxable year.

Strategy No. 2: Clear Accounts Receivable

Unfortunately, several small businesses have the habit of keeping old invoices. As much as you would like to keep those invoices, you won’t get payment from them. There’s no need to be a pessimist here. You should always have an optimistic approach to deal with complex situations. Therefore, write-off unpaid invoices from your books and get a deduction.

There’s a good chance you have equipment that’s sitting uselessly. A good deal doesn’t mean you have to drag around the old equipment with your business. Instead, write-off and clear the inventory the same as you did before. It’s never too late to get rid of the old inventory. It’s time to move on and get the loss from the deduction.

Strategy No. 3: Combine Charitable Deductions

If you, for instance, annually earn up to $10,000 in various charitable funds, it is doubtful that your deductions will be higher than $24,000. It means you won’t be able to get plenty of tax benefits from your yearly charitable contributions.

What’s the solution? Combine your past five years’ contribution ($50,000) and transfer it to a separate donor fund with an assumed federal tax rate of 30%. Consequently, you will approximately save $7,800 in your annual tax contributions. If you want to get charitable deductions for more than ten (10) years, your tax savings will amount to $16,600.

Strategy No. 4: Deduct Your Home Office Repairs

When it comes to small businesses, the deduction of home office-related expenses is a must. However, several small companies fail to deduct the amount they can. Apart from electricity bills, rent, applicable expenses, and internet costs, small businesses can also deduct relevant repair, renovation, and maintenance expenses. The best course of action for you would be to invest a suitable amount in your property and then utilize your payments to decrease personal income taxes.

Strategy No. 5: Use Up Your Retirement Savings

Not having a 401(k) plan is never a good idea. Therefore, get one from your company as soon as possible. The federal government, after all, allows small businesses with less than a hundred (100) employees a $500 annual tax credit for three-years.

All you have to do is pass the discrimination tests, and you’ll get $19,000 on your pre-tax savings. The underlying purpose is to encourage and ensure that all of your employees have retirement savings. If your business is quite small, you should opt for a straightforward single employer pension (SEP) program. As per SEP, 20% of your self-employment earnings are free of tax, with $56,000 as the highest contribution.

Strategy No. 6: Don’t Confuse Taxable and Nontaxable Advantages

The fringe advantages such as your subsidized meals, insurance, and company vehicle are great ways to make payments for the collective services for your small business. Unfortunately, most of the fringe perks have a tax tag on them. Therefore, you should acquire comprehensive knowledge about the fringe advantages that have nothing to do with taxes. 

The goal is to reduce your annual tax burden. Small businesses, for instance, can save quite a lot of amount when on payroll taxes. Remember, tax fringe benefits vary from company to company. Thus, it is vital to choose the right fringe advantages for your small business.

Strategy No. 7: Don’t Forget to Pay Estimated Taxes

It is of utmost importance that you listen to your accountant – an accountant who wants you to pay vouchers’ fees. And if you don’t, those small vouchers will accumulate a significant number for each quarter of your business. Not to mention, you might also have to pay hefty interest or even penalties. Contrary to misguided perception, don’t confuse your estimated taxes as something you can negotiate with the IRS.

Thus, spend as much time as you can with your accountant and pay close attention to numbers that have a significant value from the last year. In fact, an experienced accountant can help you find new solutions and predict foreseeable complications.

So, check the numbers, and check again. Besides, there’s a good chance you will find some discrepancies. It means you might owe fewer taxes than you previously assumed at the start of the year. And you can’t find out the exact nature of the amount until you collaborate with your accountant and pay close attention to the numbers.

Strategy No. 8: Harvest Your Tax Losses

Many small businesses end the year on net operating loss. If your business is still in the initial stages, then it makes sense. However, small businesses shouldn’t normalize the net operating loss once the company reaches the maturity age. Essentially, your net operating loss is responsible for higher tax deduction than your annual taxable income.

That said, you can use your net operating losses (NOLs) to recover most of the previous tax payments and decrease foreseeable tax payments. Furthermore, you can use your net operating losses to make a tax relief plan by including the loss into the payments and getting a tax credit by adding the net loss to foreseeable taxable income. You can, on the other hand, change the rules depending on the nature and size of your small business. Nevertheless, knowing how you can use your operating losses will have a positive impact on your small business.

Wrap Up

Take the above strategies seriously before you fully devise your annual tax strategy. Once you learn to make the right tax decisions at the right time, it will save you a lot of trouble. And before you know it, you will be able to save 20%-30% on your annual taxes.