The 411 on Tax Shelters for Small Business

Whether you’re a business or individual, you can’t escape taxes. As a small business owner, your taxes depend on the type of business structure you have, such as sole proprietorships or partnerships. Regardless of your business entity, there are legal tax shelters for small business that can reduce your taxable income.

Tax shelters for small business

A small business tax shelter is a method of reducing your company’s taxable income, which decreases the amount you owe in taxes.

There are legal and illegal tax shelters for small business owners. If you are questioning the legality of a tax shelter, contact a lawyer. Or, stick to the tax shelters the government provides to be safe.

Check out these tax strategies for small business to reduce your tax liabilities…the legal way.

1. Value deductions

Certain business expenses can earn you a healthy deduction from your small business taxes. Here are a few common IRS tax deductions you can get:

  • Home office
  • Business use of car
  • Travel expenses
  • Charitable donations
  • Capital expenses

Claiming the above deductions reduces your taxable liability. But, you need to understand and follow the IRS’s rules on deducting these expenses.

For example, only deduct your business use of a home office and car. Do not deduct personal uses. And, you can only claim up to a certain amount. For more information on small business tax strategies, visit the IRS’s website.

2. Set up retirement plans

As a small business owner, enrolling your employees in a retirement plan can be a smart way to reduce taxes for both your workers and your business. Retirement plans (not including Roth accounts) lower an individual’s taxable income because they are pre-tax deductions.

Types of retirement plans you can open include traditional, SIMPLE, safe harbor, and Solo 401(k) plans as well as SEP and SIMPLE IRA plans. If you decide to set up a retirement plan, employees can generally opt into contributing. And, you can also decide to contribute to an employee’s account with many of the plans. Your contributions are tax-deductible, which reduces your business’s income taxes.

You can also set up a retirement plan for yourself. If you are self-employed (e.g., sole proprietor or partner), you are entitled to your business’s income. Opening a retirement plan acts as a small business tax shelter and reduces your taxable income.

For more information on using retirement plans to lower your taxable income, check out the IRS’s Publication 560.

3. Offer fringe benefits

When you have employees, you need to withhold income and FICA (Social Security and Medicare) taxes from their wages. And, you need to contribute the employer portion of FICA tax. But, there are certain benefits that are exempt from FICA tax.

Fringe benefits are benefits you give employees in addition to regular wages. And, 80% of employees agree that they would choose benefits over a pay raise. Offering fringe benefits can not only be an important part of an employee’s compensation package, but it can also decrease your payroll tax liability.

Some fringe benefits, like group-term life insurance, accident and health benefits, health savings accounts, and tuition reimbursement, are exempt from FICA tax. That means you do not need to pay taxes on the value of the employee’s benefits, which decreases your tax liabilities.

To learn more about which fringe benefits are tax exempt, consult IRS Publication 15-B.

4. Defer income

One of the tax strategies for small business owners is deferring income. The process of deferring income decreases your tax liability by pushing customer payments into the next tax year. So, what exactly does that mean?

At the end of the tax year, you might find that you need to reduce your company’s tax liabilities. To do so, you need to bring in less income. You can push invoice dates back to the next year. This gives customers more time to pay, meaning they might not pay until the following year. If you don’t receive income until the following year, you don’t need to include it on this year’s tax return.

For example, a customer owes you $5,000. You can push the due date back after January 1 of the following year so that the $5,000 is not recorded as taxable income for the current year.

Need help keeping track of your income and expenses? Patriot’s online accounting software makes it easy to update your accounting books. Our software is made for the non-accountant, and we offer free, U.S.-based support. Get your free trial today!

This article is updated from its original publication date of February 13, 2018.

This is not intended as legal advice; for more information, please click here.

Stay up to date on the latest accounting tips and training