Recommended Small Business Tax Strategies

Paying taxes cannot be avoided, unless you are willing to face dire consequences.  It is a risk that does not have an upside for your business.  In fact, it is even said that aside from death, taxes are the only things that are certain to be unavoidable in this world.  It is probably true.  You may not be able to avoid taxation, but you can handle your taxes smarter…

If the mere thought of the amount of taxes you paid for the past year makes you tremble, you may want to consider the following recommended small business tax strategies that can help significantly reduce the amount of taxes that you will need to pay in the future.

  1. Always file official receipts for expenses related to the business – Even out of pocket expenses for little things such as parking fee for a meeting with a client, mailing expenses for business correspondences, or some pantry items you bought for the office can add up through the course of the taxable year.  Just make sure that these items are actually used for the business.

A lot of people are quick to dismiss them as insignificant which is actually not a wise business decision.  File and record them appropriately just as you would big regular expenditures to maximize your tax deductions.

You will be surprised to find out how much of these petty expenses you accumulate in one year.

  1. Distributing Income Strategies– This particular strategy will let you take advantage of disparities in the marginal tax rates which simply call for higher marginal tax rates as your income goes higher.  If you transfer a part of your income from business to your child or spouse who may have a lower income, you will be able to lower your own applicable tax rate.  Home based businesses are known to employ family members, and organizing in this way can save you liability.

This is one of the recommended small business tax strategies for owners with post-secondary school aged children.

For example, if you employ your 19 year old son and pay him a $10,000 annual salary, the tax he would have to pay will be very minimal because of the basic personal exemptions on income tax.  He would practically pay no tax at all if you pay him a salary equal to the personal exemptions he is allowed to claim.

While you are able to reduce your taxable income by $10,000, or whatever amount you are paying your child in the form of a salary, you have at the same time provided a good source of funding for his education.

This is a much better deal than having to credit the entire business income to yourself and subsequently shoulder the entire amount of tax liabilities due.

  1. Home based businesses are allowed some specific income tax deductions, so take full advantage of them – If you are self-employed and running a home based business, you have the option to claim a portion of what usually may be considered home expenses for deduction from your taxable business income.  This is especially true if you are utilizing a particular area of your home exclusively for your business operations.  These expenses include power, water, telephone, home maintenance, home insurance, and even cleaning materials.  You can also use part of the mortgage interest and property tax for deductions if you own your home.  The IRS website offers more details on this.
  2. Maximize your tax credits from charitable donations – Registered charities and other similar qualified donation recipients offer tax credits to prospective donors.  Giving higher amounts of donations than set thresholds can offer more tax credits as they are assessed higher rates.  However, you have to make sure that you are giving to registered charitable institutions to avoid having your donations disallowed.  It is also important to have your donations properly documented.
  3. Maximize non-capital losses – Non-capital losses happen when your actual expenses exceed your business income for a particular taxable year.  Before using it, however, decide on where it can best be applied.  A non-capital loss can be utilized to offset other forms of personal income for a particular year.  It may be a better strategy to use it for taxes you already paid in the past or to just carry it over to a year where there is a bigger tax bill rather than to use it in the year you incurred the capital loss.
  4. Properly manage your Registered Retirement Savings Plan (RRSP) Contributions – Although this may probably be the most ideal income tax deduction for small businesses, it does not necessarily mean that you will need to make the maximum contributions each year.  But proper management of your RRSP is one of the more highly recommended small business tax strategies.

Your allowable contribution limit can be carried forward if you are unable to use it for a particular year.

To maximize your deduction from such contributions, project your total income for the year then decide on how much of a contribution to make, if warranted.  After all, it will be unusual to make a big contribution on a year you are not expecting to make a good income.

Always bear in mind that the amount of taxes you have to pay annually is not absolute.  With proper planning and the use of the appropriate strategies for small businesses, you can reduce the amount of your tax bills, quite significantly in some cases.

Sometimes, it takes doing just the simple things to help significantly lower your tax liabilities for a given taxable year.


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