All businesses have the option to choose how they want to report expenses and income based on their business model. The biggest thing is to choose an accounting method and stick with it.
Let’s look at some strategies you can use to reduce your taxes and maximize your success.
There are 2 main accounting methods:
- Cash – this method involved reporting funds as soon as you receive them
- Accrual – this method involves waiting until you complete a project to report your income
The option you choose to go with will make a difference in your businesses’ ability to schedule your tax payments. This is why it is imperative that you make an educated decision when you start your business and stay with it.
If you start with one method and choose to switch to the other method, keep in mind that doing so has a high cost and requires the business owner to fill out a lot of forms to make a change.
Let’s look at some strategies to reduce your tax requirements.
Accelerate your Expenses at the End of the Year
This strategy is for expenses you plan to benefit from toward the beginning of your fiscal year. You can choose to pay for the expenses before or on December 31st rather than paying at the time you need the product or service, say in February. Doing this provides you with a tax credit for the expense, which means your liability for it is postponed by a year.
Find and Utilize Tax Credits
The government puts tax credits out there for businesses to promote what they see as positive behavior from a business standpoint. The bonus for you is they are simply a means of receiving pure cash back towards your tax obligations.
There are many types of tax credits ranging from providing education to credits for making energy-saving improvements to your business. Ensure that you and your tax advisor look at what opportunities are out there and take advantage of everything you can.
Strategy # 3
Increase your Withholdings
This is a strategy that can be used in certain financial situations. Typically it can be a faux pas for someone to increase their withholding, but there is one instance in which you would want to do so:
If you made more money last year, and you anticipate making the same amount this year, increasing your personal withholding would likely be the best decision. This is something to review with your tax advisor as you don’t want to increase your withholdings if it won’t benefit you. This is basically giving the IRS an interest free loan.
Are these all the strategies available? Absolutely not, this is just the tip of the iceberg. The best thing you could do as a business owner is have a trusted financial/tax advisor and to meet with them regularly throughout the year to assess your situation and make adjustments as necessary.