With inflation on the rise, businesses and individuals alike are looking to save money. One method is to take tax deductions. Here are a few ways that a business can access those tax savings.
Employee Benefits
Healthcare plans, paid leave, certain retirement plans, and many other employee benefits can be deducted from taxes. Not only that, but these improvements can help attract new talent and retain current employees. Some upgrades, such as renovations for the purposes of accessibility, can also support the community and improve the reputation of the business. Some job-related resources may also qualify for deductions, such as employee uniforms and tools.
Restructure the Business
A business’s type can have an impact on how much it will pay in taxes. LLCs are taxed differently depending on which state they operate in and can be treated as either a corporation, partnership, or a disregarded entity (which would appear on the owner’s taxes). Meanwhile, taxes for a sole proprietorship will depend on what the owner is liable for, and can include income tax, social security, unemployment tax, and various others. If your business is paying a high amount in taxes, consider restructuring to a business type that will pay less.
R&D Tax Credits
Certain research and development activities can be counted as a tax credit. These credits can apply to both scientific endeavors and development of products. For a business’s R&D activities to qualify for this credit, it must fulfill the four IRS requirements below.
- Permitted Purpose: The R&D must create or upgrade a component of the business.
- Technological Development: This must be based on a hard science. This includes computer sciences and engineering.
- Elimination of Uncertainty: Some uncertainty must have been faced by the business, which is then clarified by the new development.
- Process of Experimentation: The business must follow the scientific method and investigate multiple options to solve the problem.
If your business conducts R&D, explore whether it qualifies for a tax deduction. It may also be beneficial to change the business’s R&D methods or documentation in order to qualify for this credit, as long as you do not incur high expenses from doing so. Development, labor, research fees, and materials are some examples of the expenses that can be counted towards the R&D tax credits.
Delayed Deductions
Some tax codes allow a business to take deductions on assets that depreciate over the course of several years. Essentially, instead of claiming the whole purchase at once, you can make a claim on the amount the item has depreciated that year. This may be helpful for a growing business for which a tax deduction might be more beneficial in the future than it is now. Making use of this strategy requires some knowledge of the business’s trajectory as well as market trends, such as whether the business’s industry is expected to grow or shrink in the coming years.
Other Deductions
Listed below are other deductions that may be applicable to your business:
- Travel costs. If any of the business’s members needs to travel for work-related reasons, the expenses incurred from that travel can be counted as a tax deduction. Travel deductions can account for much more than just gas and airfare, though. You may be able to deduct hotel costs and meals as well. Be sure to keep detailed records of the trip so that you can prove it was business related.
- Operation costs. Expenses reduce the amount of income that is taxable. Rent and utilities add up drastically over time, and can go a long way towards reducing your taxable income.
- Charitable donations. Money and assets donated to charity can also be deducted from taxable income. This has the bonus of supporting the community and gaining publicity for the business.
- Startup costs. A business that has recently been opened could be eligible for startup deductions. The amount deducted depends on how much was spent on opening the business.
Conclusion
Taxes can be complicated. It can be easy to miss a deduction among the many forms that need to be filled out, but there are several ways for a business to save money on taxes. Consult a tax professional like EW Bookeeping and Consulting to see what options best fit your business.
