5 Strategies for Small Businesses to Reduce Tax Liability

June 19, 2023
Kayn Ars
Strategies for Small Businesses

For Smaller businesses, the best way to reduce tax liability is by implementing tax-saving strategies. The major factor that contributes to a tax liability for smaller businesses is a business type and its entity. There are a lot of ways in which a business can save its money. Find below some of the ways that how small businesses can reduce their tax liability.

5 Strategies to Reduce Small Business Tax Liability

There are a number of strategies that small business owners can use to reduce their tax burden. Some of these strategies include:

Choosing the right business structure

The very first strategy to reduce tax liability is the type of business structure you choose can have significant tax implications. For example, if you operate your business as a sole proprietorship or partnership, you will be taxed on your income tax return. On the other hand, if you operate your business as a corporation, you will be taxed at the corporate level and may also be subject to double taxation on any profits that are distributed to shareholders.

Taking advantage of deductions

Small businesses can take advantage of various deductions to lower their tax bill. These may include deductions for business expenses such as advertising, employee salaries, rent, and supplies.

Deferring income

If you expect to be in a lower tax bracket in the future, you may be able to defer income until a later tax year by using strategies such as holding off on invoicing clients until the following year.

Offsetting income with losses

If your business has a net loss for the year, you may be able to use that loss to offset income from other sources, such as your salary or investments.

Offsetting income with charitable contributions

If your business makes charitable contributions, you may be able to claim a deduction for the value of the donation.

What is the tax liability of a small business?

What is the tax liability of a small business

Small business tax responsibility is the tax due on its business income. The federal and state tax for any business depends on its entity. Some federal payments can be done throughout the year. If the small business has employees, it will also fall under the requirements of federal tax payment.

When Are Business Taxes Due?

The due date for business taxes depends on the type of business and the tax form being filed. Here are some common business tax due dates:

Self-employed individuals

If you are self-employed and file a Schedule C (Form 1040) to report your business income and expenses, your taxes are due on April 15th, along with your income tax return.

Partnerships

If your business is a partnership, the partnership must file Form 1065 (U.S. Return of Partnership Income) and provide each partner with a Schedule K-1 (Form 1065) by the 15th day of the third month after the end of the partnership’s tax year. The partnership’s tax return is due on the 15th day of the fourth month after the end of the tax year.

Corporations

If your business is a corporation, the due date for filing your tax return depends on the type of corporation you have. C corporations must file Form 1120 (U.S. Corporation Income Tax Return) by the 15th day of the third month after the end of the tax year. S corporations must file Form 1120-S (U.S. Income Tax Return for an S Corporation) by the 15th day of the third month after the end of the tax year.

Can a small business choose LLC and S- Corp at the same time?

Small businesses usually choose the LLC because LLC offers more liberty than S corporations. Though a business can opt for both of these aspects simultaneously. For smaller businesses, if they have an LLC partnership, their tax due date is March 15, if they’re LLC-Corporation then their due date is 15 of April and if they are LLC-S Corp then the due date is also the 15th of March.

Note that these are general guidelines, and there may be other tax forms and deadlines that apply to your business. It’s always a good idea to consult with a tax professional to ensure that you are meeting all of your tax filing and payment obligations.

What are the Different Types of Business Taxes?

There are several types of business taxes that a company may be subject to, including:

  • Income tax: This is a tax on the profits earned by a business. The rate of income tax can vary depending on the size and type of business, as well as the location in which it operates. However, partnership business does not pay income tax but still they have to report their profit and losses on their tax return.
  • Sales tax: This is a tax on the sale of goods and services. The rate of sales tax can vary depending on the location in which the business operates.
  • Property tax: This is a tax on the value of a business’s physical property, such as buildings, land, and equipment. The rate of property tax can vary depending on the location in which the business operates.
  • Payroll tax: This is a tax on the wages paid to employees by a business. The rate of payroll tax can vary depending on the location in which the business operates.
  • Excise tax: This is a tax on specific products or services, such as gasoline, alcohol, and tobacco. The rate of excise tax can vary depending on the location in which the business operates.
  • Self-employment tax: It is a tax that is paid by self-employed individuals on their net earnings from self-employment. It includes the same types of taxes as employment tax, but it is paid entirely by the self-employed individual. The self-employment tax rate is generally higher than the employment tax rate because self-employed individuals are responsible for paying both the employer and employee portions of the tax.
  • Employment tax: It’s a tax that is paid by employers and employees on wages earned by employees.

Read More:

What Will Happen If You Don’t File or Pay Taxes For Your Small Business?

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Tax Planning Services & Best Income Tax Advisory Services in USA

Conclusion:

It’s important to keep in mind that tax laws can change frequently and can be complex, so it’s always a good idea to consult with a tax professional or financial advisor to determine the best strategies for reducing your tax burden.

1 comment

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March 11, 2024

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