How to Reduce your Company’s Taxable Income
Updated: Jun 5
Every business must file and pay taxes. The goal of every small business owner is to reduce their company’s taxable income in order to keep more of the profits or reinvest them back into the business. Unfortunately, many companies often overpay on their taxes because they fail to take advantage of all allowable deductions or fail to run their business efficiently from a tax perspective.
Here are 3 ways to reduce your taxable income:
1. Maximize Deductions
The IRS allows certain expenses to be deducted from taxable income. To qualify, the expense must be deemed “ordinary and necessary” to the operation of the business. Some of the most common expenses include home office expenses, vehicle expenses, travel and lodging expenses, meal and entertainment expenses, costs to purchase business equipment, phone and internet service, and professional dues and subscriptions. Other not so common deductions include charitable contributions, financing costs for the business, the business insurance deduction, and the qualified business income deduction. It is important to include every eligible expense in order to reduce the portion of business income that can be taxed. It is just as important to maintain meticulous records in order to be able to deduct the expenses correctly.
2. Invest in Employees
Another way to reduce your taxable income is to reinvest it back into your business, specifically your employees. Generally, employee wages, salaries, and bonuses are subject to federal income tax withholding, social security, Medicare, and federal unemployment (FUTA) tax. However, certain fringe benefits such as life insurance, educational assistance, dependent care assistance, employee discounts, and health savings accounts do not trigger employment payroll taxes for the business. In addition, the expense associated with setting up a tax-deferred retirement plan such as a 401(k) and the matching contributions are both tax deductible to the business and may even provide the employer with a tax credit when initiating the plan. Offering your employees a more complete compensation package that includes some of these benefits is a win-win as it will boost employee morale, attract top talent, and may even help you pay less in taxes.
Whether you are a microbusiness, ready to onboard your first employees or an established, growing organization with more complex payroll needs, Sage has intuitive payroll solutions that will help your organization grow and manage their workforce. Manage your team and their pay effortlessly with payroll and HR solutions from Sage.
3. Optimize Tax Reduction Strategies
Proactive, strategic tax planning can also help you lower your taxable income. For example, investing in tax-deductible or tax-exempt funds, like retirement funds and municipal bonds, are good ways to reduce the income that is taxable by the government. Another strategy is to use accountable plans to reimburse employees for business expenses without having to report them as employee income which would mean more payroll taxes the business would have to pay. There are also some year-end strategies that can reduce taxable income such as deferring some of the taxable income to a future year, acquiring machinery and equipment before the end of the year and depreciating it all at once rather than in other tax years, paying for property taxes early, and writing off bad debt for receivables you are not expecting to collect.
The U.S. Tax Code is close to 7,000 pages. However, when you include the federal tax regulations and official tax guidance, the number of pages raises to approximately 75,000 pages. As a result, the best way to stay current with the changes on tax law is to hire a reputable certified public accountant. At CPA by Choice, we can help you choose the most appropriate and effective tax strategies for you and your business. Have questions? Feel free to call us or send us a message.