As the world is moving to the end of the year, taxpayers are getting the usual concern about their tax treatment. How to reduce taxes and save more of their incomes is a trending question among all the businessmen. After all, it is the earning of all the hard work that you did the whole year, therefore the concern to save more of it is reasonable. But the general doubt arises how to pay less taxes using legal and ethical ways? Thankfully the Internal Revenue Services (IRS) allows individuals and businesses to plan and prepare tax-saving strategies.
It is possible to reduce taxes that are to be paid to the government by proper and mindful tax planning. The basic thought behind tax planning is to manage and direct your financial affairs in such a way that you end up lowering your due tax liabilities. Tax saving plans focus on three variables – lowering your total taxable income, increasing your areas for deductions, and taking benefits of possible tax credits. Where tax planning is a more pervasive area and requires to be practiced with all along the year, tax avoidance is a way that can help you in increasing your tax savings at the end of the year. And a proper mix of these two tax-saving tools, you can reach the answer to the question of ‘how to eliminate taxes’.
Strategies to reduce your tax liabilities for the year-end
Talking about both tax planning and avoidance we have deciphered some best tax-saving strategies comprising a balance of both. Here are the 15 best tax-saving tips that you can use to reduce your tax liabilities at the end of the year.
- Look for Qualified Business Income Deductions
The IRS introduced a Tax Cuts and Jobs Act in 2017 that came into effect in the year 2018, which includes a newly amended tax deduction for business owners. Under the shadow of this act, business owners are eligible to take up to a 20% deduction of qualified business income in addition to other allowed deductions. The owners who operate a pass-through business such as sole proprietorship, S corporation, or partnerships and file their business’ return under their personal return are legally authorized to take the advantage of this deduction.
- Save taxes by prepaying and storing stocks
According to the IRS, you are required to pay tax on savings as well. The interest earned from savings accounts is partially taxable. Therefore instead of putting your money in bank accounts, you can use it for stocking up on office supplies and factory materials. Another way to use it is to pre-pay the expenses. You can pay your business insurance bills and mortgage in advance and you can deduct these expenses for the current year’s tax calculation.
- Invest in energy-efficient vehicles and property
The government is encouraging the use of environment-friendly and energy-efficient equipment to reduce the cause of pollution and global warming. And to support this thought the IRS provides various tax deductions on the purchase of these energy-efficient vehicles and equipment. You can consider buying such assets to enjoy the deductions offered by the authorities to reduce your taxable income.
- Tax saving using an accountable plan
An accountable plan is a process of reimbursing your subordinates that works for your business for the business-related expenses. They are not subjected to be treated as taxable under the IRS as they are not supposed to be a part of the compensation for the work. Through this plan, businesses are allowed to deduct the expenses that are not treated as the incomes to employees in the business accounts, thus clearing a way to reduce taxable amounts.
- Write-off Bad Debts
Bad debts are the amount that according to you are not recoverable for the time being. It can include credit sales, loans to clients, employees, and vendors. You can write off these lent amounts as bad debts and can deduct these amounts from your business taxable income to reduce your tax liability.
- Time Income and Expenses of Your Business
A significant part of tax management is timing up your expenses and incomes. You have to anticipate the year when your business can expect more income and then to balance that you should increase your business expenses by acquiring more assets or prepaid expenses etc. By working in this way you can manipulate your income statements to reduce the burden of your payable tax liabilities.
- Tax credits for business
Tax credits are the incentives provided by the government to promote the activities that support the greater good. You can take the benefits of these tax credits to lower your tax liabilities. Tax credits are one of the best ways to save tax as they are deducted from the gross before-tax income lowering your net taxable income. There are several ways in which you can gain tax credits like purchasing energy-efficient vehicles and equipment to promote the go green agenda, promoting research and development activities, enabling access to disabled employees and the public, providing health coverage benefits to your employees. In addition to these, the government has recently launched two new coronavirus tax credits that are employee retention tax credit, sick leave and family leave tax credit to support both the owners and their employees.
- Postpone incomes
To lower the taxable income of your business you can avoid adding incomes in the last months of the year. This will decrease your incomes on the return for time being ultimately resulting in a reduction in your tax burden. However, this will be effective for the time being as you will become liable to pay taxes on those incomes as soon as you receive them.
- Contribution to retirement funds
Making and contributing to the retirement funds for you and your employees can help you in deducting taxes. The IRS has defined certain retirement funds that are qualified to provide you deduction while the tax ascertainment. These funds can be selected at your will, considering your business plans and goals but make sure you are contributing to a qualified retirement fund to take the benefits of the deductions to reduce your tax burden.
- Bonuses and Gifts for Deduction
The year-end is the best time to extend bonuses and gifts to your employees if you haven’t already allotted them to your co-workers. These bonuses and gifts are also subjected to bring you the deductions to reduce your tax liabilities. However, this cannot be a beneficial step if you are operating a sole proprietorship, partnership, or S corporation as they are considered self-employed in the views of the IRS.
- Purchase business capital goods for depreciation
Businesses can claim tax deductions on the purchase of any capital goods such as machinery, equipment, vehicle, etc. for their business. The two most beneficial depreciation deductions provided by the government are deduction under sec. 179 and bonus depreciation. Deductions under section 179 allow the businesses to immediately deduct the cost of certain assets up to $ 1 million w.e.f. 2017. And the bonus depreciation is an added benefit for acquiring business assets which allow the business to take deductions from 50% to 100% of the value of assets.
- Expenses for next year and deduct this year
Another way to lower your taxable income to turn down your tax liability is by expanding your income for future use. If you have any business or professional expenses that are to be made next year, then by expanding them now, you can use them to reduce your taxable income, thus reducing your tax liability. You can buy inventories and supplies in advance that you may require for the coming months. This is a sort of investment to reduce income tax.
- Write off obsolete equipment and inventory
Writing off obsolete and old equipment refers to bring them down from your balance sheet. It has the same effect as the depreciation has on these pieces of equipment lowering your net taxable income promoting a reduction in your tax burden. You can write off the assets that you don’t need in your business replacing them with new capital goods to get a double deduction. Also, to deal with old inventories you can donate them to charity to gain an extra tax deduction.
- Donate for Charity to gain deduction
To promote the noble cause of charity, the federal government also offers deductions for donations and charity. As a businessman, you can take advantage from these deductions up to 25% of your taxable income. You can also invest in opportunity zones to gain extra deductions. These are the distressed and economically backward areas the government provides special deductions to encourage economic development in such areas.
- Abandoning business property
If your business holds any property that adds no value to it, you can abandon such property instead of selling it for a low cost. You can abandon any property including vehicles and equipment to get the loss deduction. Intangible assets such as goodwill can also be abandoned for the deduction.
How to Find the Right Tax Accountant near You?
Consult a Tax Advisor
Consult a tax professional before making any decision that can show a negative impact on your business as well as your tax return. A tax advisor has the appropriate knowledge and skills that are required to strategize tax saving plans smoothly. They are highly qualified professionals and have a better understanding of the earnestness of the subject. Hiring a tax consultant can benefit you with a personalized prescription about the steps that should be taken to reduce the taxes according to your business.
A tax advisor can guide you better in following the above-mentioned tips to reduce taxes for your business as well as providing you with other related assistance like tax computation and return filing. So if you are considering hiring the best tax advisor to assist you for the purpose, then you should look no further. The Together CFO is the best tax advisory company based in the USA. The professionals working with us are masters in handling tax-related issues for both businesses and individuals. We ensure that you get the assistance of the best tax consultant in Los Angeles.