Tactics for paying less tax

One expense every business owner wants to pay less of is tax. Luckily there are some strategies and processes you can put in place to minimize how much tax you pay.

Claim every expense you can

Tax obligations go hand-in-hand with running a business – you can’t get away from them. But you can be smart and find plenty of opportunities to cut your tax bill. As a small business owner, you can claim a lot of your expenses back. For example:

  • Travel – if you take a trip that’s mainly for business purposes, like to a conference or meeting a potential client, you should be able to deduct transport and hotel costs. Business meals and entertainment (where business is discussed) can also be claimed as an expense.
  • Health insurance – if you’re a sole proprietor, you’ll be able to claim health insurance for yourself and your family.
  • Accounting software can help you keep your records up-to-date so you’re in a position to make any potential claims.

Keep detailed records

If you’re super organized and ensure that you have full details of every business expense, you’ll never miss making a claim – and as a result, you’ll pay less tax.

It’s always advisable to hold on to any receipts related to your business. But in particular, you’ll need to keep track of receipts for your meals, lodgings and entertainment expenses while on business trips or when meeting customers.

File your returns on time

This seems obvious but filing on time will mean you’ll avoid any penalties or interest. Use an online accounting service to track each of your expenses and ensure you never forget to make claims on them.

Take advantage of the end of the financial year

The end of the financial year can be an excellent time for adjusting areas of your business, to make sure you’re being smart by reducing net profit legitimately.

If you’re able to adjust your business’s income or expenses to lower your net profit, you’ll be able to decrease the amount of tax you owe. For example, just before the end of the financial year you could:

  • Hold a stocktake sale – to clear out old stock and lower your cost of goods sold. This will remove the value of older stock from your books.
  • Write off bad debts – if you’ll never see some debts owed, write them off and reduce your profit for the year (and hence your taxes).
  • Declare income in advance the following tax year – if you’ve been paid for work that you won’t complete until next tax year.
  • Purchase some fixed assets – to lower your net profit by claiming a piece of depreciation immediately.

Set up a home office

If you set up an office at home, you may be entitled to claim a portion of your housing costs as business expenses. To meet the requirements for making a claim, you have to use part of your home exclusively and regularly:

  • As your main place of business, or
  • As a place where you meet with customers in the normal course of your business.

Portions of expenses like utilities, maintenance costs (such as insurance, repairs and cleaning supplies), property taxes, and mortgage interest can all potentially be claimed back.

Avoid penalties when getting audited

If your business gets audited, you’ll want to make sure you’ve kept accurate records and utilized accounting software that tracks all your sales and expenses (and links to your bank account). Any uncovered discrepancies may mean you need to pay penalties, so be sure to:

  • Report your income precisely and respond to any inquiries from the IRS as soon as possible.
  • Only claim for legitimate expenses – for example, if you operate a small taxi boat service and you claim a deduction for purchasing some water skis or a wakeboard, you’ll likely be red-flagged.
  • Fully understand your tax information – if you hire an accountant or bookkeeper to assist you.

Split income

Corporate tax rates are generally lower than the personal tax rates of the owner(s) of a business. So if you own a small business with your partner or business associate, it might be worth your while to retain some of your earnings in the business.

In other words, if you (and any co-owners) pay yourselves less personal income and keep more in the business (to be taxed under corporate rates), you’ll probably pay less tax.

Seek advice

Each industry is defined by different characteristics and has its own timings for claiming expenses. It might be a wise idea to find a tax expert in your particular industry and get their advice. At the end of the day you’ll want to declare everything you need to, and claim back all that you can.

Next steps

This material has been distributed for general educational/informational purposes only, and should not be considered as accounting, tax or legal advice or recommendations by Comerica Bank, its affiliates or subsidiaries.

Comerica Bank and its affiliates do not provide tax or legal advice. Please consult with your tax and legal advisors regarding your specific situation.

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