Nowadays, entrepreneurs find ways to pinch a few pennies, especially while incurring tax payments. After all, the annual income tax, general sales tax, and corporate taxes drain company profits, making it arduous for businesses to survive. Fortunately, there are a few ways to save money on business taxes.
Firstly, select your business entity wisely. An S corporation offers massive tax benefits, whereas a C corporation has a structure similar to a limited liability company (LLC). Similarly, an S corporation offers pass-through taxation where entrepreneurs can deduct business expenses. That way, you can deduct business costs and reduce the taxable income.
Furthermore, S corporation doesn’t involve corporate taxes on profits and income; all taxes pass to the shareholders. It means every shareholder pays tax based on their proportionate share of stock in the company. If you want to learn more about this, keep reading.
Why Choose an S Corporation for Tax Savings?
Believe it or not, choosing the correct entity can make all the difference when minimizing tax liability. Hence, S corporation is the ideal choice for small and medium businesses. It offers pass-through taxation where shareholders incur their tax payments. It also avoids the double taxation structure, where a company pays corporate tax, and shareholders pay taxes on dividends. Above all, S corporation qualifies for a 20% deduction on overall business profits.
If you haven’t registered your business entity yet, look up forms of S corporation. You should especially know about Form 1120-S. It is an income tax return for US companies registered as S corporations. Similar to other filings, you must file Form 1120-S by the end of your company’s financial year. One of the main benefits of filing this form is clearly showcasing your business’s income for the IRS, leaving no room for doubt. You can discover Form 1120S benefits now by visiting relevant filing consultants such as ERC Today! It enables entrepreneurs to report all gains, losses, credits, and other financial information related to the business.
So, now you know what exactly an S corporation is and how it leads to tax savings; let us help you explore ways to maximize them.
1. Pay Yourself a Salary
As a business owner, you will be liable to pay tax on your income – income tax. The best way to minimize this self-employment tax would be to pay yourself some salary. It will ensure compliance with IRS regulations while allowing you to receive income through compensation and distribution. That way, you can minimize your taxable income as compensation received isn’t tax deductible.
Remember, IRS requires S corporation’s shareholders to pay themselves a fair salary for the services they provide to the company. If the salary amount exceeds the market average, it can lead to massive penalties and additional taxes. Therefore, manage your income structure smartly and use low tax slabs on all distributions.
2. Deduct Your Insurance Premium
Every corporation incurs expenses on insurance, but only a few can deduct it from their taxable income. Fortunately, S corporation owners can deduct health insurance costs through their W-2 wages. But for this, you must create a plan. It should cover all details about the insurance premium and rules governing how the reimbursements will be handled.
Owners could submit their insurance expenses to the company, and the company can include that amount in their W-2 wages. That way, they can get reimbursed for their insurance bill. Likewise, the insurance premiums also become deductible for income and payroll tax purposes, reducing the taxable income.
3. Rent Your Home
Have you rented office space, or are you using your home office? Entrepreneurs using their home office for business activities can rent their home to S corporation. You can designate a specific area of your home for business operations and rent that space to the corporation. As a result, you can deduct that rent from expenses and lower the taxable income. After all, rent would come under office expenses. However, before you begin this rental procedure, go through all IRS guidelines and document the rental agreement properly. It will ensure the arrangement is legitimate.
4. Reimburse Travel Bills
Reimbursing travel expenses is another strategy to reduce taxable income and maximize savings with an S corporation. But remember, only business travel can get reimbursed. That would include your airfare charges, accommodation, meals, and other transportation expenses. You must treat them like a business expense and deduct them from the gross profit. It will reduce your income while lowering your tax liability. It is essential to maintain records of all travel bills for IRS scrutiny. Lastly, consult with a tax professional to ensure you abide by all the rules while maximizing your tax savings through this strategy.
5. Depreciate Your Assets
Has your company invested in any fixed assets? If so, start depreciating your assets over their life. It will enable you to spread the asset’s cost over its useful life, improving the company’s financial position. You can also treat depreciation as an expense in your income statement. According to International Accounting Standard (IAS-16), this is the correct fixed asset treatment.
For example, if your asset is worth $50,000, you will use it for five years. You can include $10,000 as depreciation in your financials. This amount would be tax deductible, lowering your liability and maximizing tax savings.
6. Deduct All Expenses
Alongside travel bills and insurance plans, you can deduct other business expenses to increase tax savings. Look below.
- Cell Phone Costs: If you have been utilizing your mobile phone for business purposes, deduct its cost from business expenses. It can include phone costs, service charges, and bill payments. To qualify for this deduction, you must set an accountable plan and document the use of a cell phone for business.
- Vehicle Expense: Using your vehicle for business allows you to seek reimbursement for gas, repairs, and maintenance under section 179. However, there are several requirements to avail of this deduction. The vehicle must be new, the company should own it, and it must be used at least 50% of the time for business.
It is always wise to choose a business structure based on tax considerations since they can have a long-term impact. S corporation offers a combination of pass-through taxation with tax deductibles, offering small business owners the flexibility they deserve. Taking advantage of these tax savings and deductions will enable them to reinvest profits and upscale their business. Therefore, learn what S corporation offers and select your business entity accordingly.