Minimizing Federal Taxes for your business

Every year, stories come out about how some big corporations legally pay little or nofederal taxes.

This might not be possible, or even desirable for small businesses, but that doesn’t mean you can’t minimize business taxes.

Today’s post is going to do just that. We’ll look at four ways your business can keep more revenue for growth.

While it won’t be exhaustive (that would take a book), it will get you thinking and give you some resources to dig deeper.

Let’s go!

Operating at a loss

Okay, so we’ll eat the frog, first. Losing money is not a sustainable way to avoid federal taxes, but if that grey cloud does appear, you might as well find the silver lining.

Chances are, if you have a net operating loss this year, your business won’t owe federal taxes. So you can cash in right away.

However, if you expect a profit next year, you can apply that loss to lessen that tax burden instead.

The Internal Revenue Service calls this tax provision a loss carryforward, and it can be a powerful strategic tool when used correctly and with the correct form of corporate organization.

With that out of the way, let’s concentrate on more sustainable ways to reduce your business tax burden.

Deductions and Credits

This is almost as obvious as operating at a loss, but not as painful. It’s also one of the ways many large corporations reduce their burden.

Deductions are arguably the most misunderstood tax reduction tactic, and that makes it easy to run afoul of the IRS.

The safest thing to do is consult a tax professional before making a big purchase, hoping it will be a good deduction.

Tax credits are another way to potentially lower your tax burden. For example, if you owe $1000 in taxes on your return but have a $1000 tax credit, you owe $0.

A host of federal tax credits are available, including work opportunity tax credits, employer-provided childcare tax credits, and clean vehicle credits.

You can see the full list here and see if any of these apply to our business situation.

As with deductions, make sure you check with a tax professional before trying to take a tax credit.

Depreciation

If your business has large equipment expenses, depreciation can help with tax burdens. It does so in two ways.

First, you get to deduct the asset’s cost over several years. This is a big help, especially in the early years, if accelerated deprecation methods are used.

The next area in which it helps is financial reporting. Depreciation reduces the book value of assets over time, which in turn, affects the balance sheet. That’s because the depreciation expense reduces taxable income, potentially lowering tax payments.

That’s the simple part.

What depreciation method to use is more complicated and is beyond the scope of this post. But if you want to dig deeper (or just ask your CPA the right questions), dig deeper into straight lines, double declining balances, and bonus depreciation methods.

If your business doesn’t require big equipment purchases, there’s another area to look into.

Pass through entities

These are business structures and include sole proprietorships, LLCs, some partnerships, and S-Corporations.

What they all have in common is that profits “pass-through” the business and wind up on the owner’s individual tax returns.

This can help avoid double taxation and simplify tax reporting. They also potentially allow the owner to deduct business profits against other forms of income like wages and investment income.

The Bottom Line

Never paying taxes on business income isn’t likely. It may not even be advisable. But you should always be looking for ways to reduce your tax burden so that money can be plowed back into your business.

But don’t go it alone. This overview gets really complex once the surface is scratched. So, consult a tax professional and see which areas can be part of your business tax strategy.