The owners of small- and mid-sized businesses face complicated tax regulations and burdens that most individuals do not. While large companies can afford full-time accountants and bookkeepers to devote their time to dealing with taxes, an individual owner can be left on their own.
Your friends at Numbers House can help. We have a couple of thoughts on tax-reducing options available to small business owners.
Take Shelter in a Retirement Fund
First, a short-term measure to reduce your income in the current taxable year. You can’t be taxed on income you don’t receive. Making contributions to retirement accounts like traditional IRAs are a quick way to reduce your taxable income as a business owner while building a secure foundation for your future.
Although traditional IRA contributions cap at $5,500 per year for those under 50 years-old and $6,500 for those over 50, business owners have other financial options that can let them reduce a much higher percentage of their taxable income. These options can include 401(K)s, SEP IRAs, or cash balance pension plans.
Restructure Your Business
Next, a long-term idea to think about for the next tax year: Business owners can also consider switching their normal corporation to an S corporation designation. Named after Subsection S of the tax code, S corporations receive special tax advantages. The corporation does not pay taxes on earnings. The income is passed-through to shareholders/owners, who report any profits or losses on their personal tax returns and pay any resulting taxes directly. This avoids the threat of double taxation.
Other advantages of an S corporation designation:
- Business owners can avoid paying FICA taxes on total net earnings.
- Owners of pass-through business entities, like those classified as an S-corporation, can also deduct 20 percent of their business income on their individual tax returns.
Let Us Help
If you need assisting with tax planning to reduce your financial burden in the next year, need some advice on steps you can take now, or want help restructuring your business, contact us today. Call Numbers House at (865) 294-7300 or email us at email@example.com.