How to Lower Your Small Business’ Tax Bill This and Every Year

Every penny you save in taxes is a penny you can reinvest in your business.

Although taxes may be the least-favorite topic for small business owners, it’s one of the most important. Tax planning should be a part of almost every business decision. Effective tax planning could help you to maximize your tax deductions and take advantage of tax credits to minimize your bill. Planning before paying your taxes can not only put more money back into your pocket, it can also help keep your business out of trouble with the IRS.

What are tax credits and how do they differ from tax deductions?

Tax credits and tax deductions both lower your tax bill, but they do so in very different ways. Tax credits are given to companies as incentives for certain activities. They’re valuable for your business because they’re a dollar-for-dollar reduction in the tax that you owe. A $2,000 tax credit can save you $2,000 in taxes.

A tax deduction lowers your taxable income and your savings are equal to a percentage of your marginal tax bracket. That means that a $2,000 tax deduction, at a 20% tax bracket, will save your company $400 in tax.

What are some common business tax credits?

One of the most popular business tax credits is the Credit for Increasing Research Activities. Commonly known as the R&D tax credit or research tax credit, it can be claimed for increased expenditures in qualified research. If your company is developing a new or improved product, creating software, engaging in engineering, architecture, scientific or technical services or improving a manufacturing process, the R&D tax credit could potentially save you thousands of dollars.

Another popular tax credit, the Work Opportunity Tax Credit (WOTC) is available to employers that are hiring qualified individuals in groups that traditionally face employment barriers, like those in families receiving certain government benefits, veterans with service-related disabilities and those receiving supplemental income from Social Security. In general, the amount of the credit is 40% of the qualified worker’s first year wages up to $6,000. For veterans, that amount increases to $12,000-$24,000.

For individuals who own restaurants, bars or other food and beverage establishments, there is a valuable credit to take advantage of: the Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips. This income tax credit applies toward employer-paid payroll taxes on employee tips.

There are a variety of credits designed to incentivize alternative and clean energy. For example, the Biodiesel and Renewable Diesel Fuels Credit is available to gas stations and other businesses that sell biodiesel fuel. Other energy-based credits for businesses include the Alternative Motor Vehicle Credit, the Alternative Fuel Vehicle Refueling Property Credit, the Energy-Efficient Home Credit, and the Energy-Efficient Appliance Credit, which is available for manufacturers of eligible appliances.

Don’t qualify for any of these? Talk to your tax professional or visit irs.gov to see other available tax credits for small businesses.

What tax deductions are available for small businesses?

In general, most business expenses are deductible, including employee salaries, retirement plans, rent for a storefront, insurance costs and more. Your company has options about when and how to claim certain deductions or report income in order to change the taxes you owe.

For example, employers matching employee retirement contributions can delay depositing those contributions up until the due date for filing their federal income tax return for the year. That includes employers who obtain an extension for filing a tax return; they have until the end of that extension period to deposit a contribution in order for those contributions to be deducted on their previous-year tax return.

Additional deduction options for business owners include opportunities to claim accelerated depreciation on purchases made in 2014. Accelerated depreciation allows your company to deduct the cost of assets faster than they actually depreciate. The popular Section 179 deduction and bonus depreciation are examples of accelerated depreciation provisions.

Section 179 allows businesses to deduct qualifying equipment and property purchases by front loading them into a single tax year. Bonus depreciation allows business owners to take 50% bonus on their purchases of qualifying new tangible assets (such as furniture, cars or equipment) made in 2014, with no limit.

For more information about deducting business expenses, speak to your tax professional or visit irs.gov.

How else can I save on my tax bill this year?

Saving money on your tax bill can be as easy as changing the way you accommodate employees. Rather than provide your employees with a raise, compensating them with an increased contribution to their health insurance or retirement plan can reduce income and payroll tax for both you and your employees.

Another way to possibly lower your tax bill is to restructure your business. There are a number of different business structures (partnership, LLC, S-corporation and C-corporation); do you know how each one would affect your company’s tax situation? If you are a C-corporation right now, you have 75 days from the beginning of each year to elect to convert your company into an S-corporation. Speak with a tax professional to determine which structure is the best fit for your business.

Finally, if you want to minimize your tax bill, stay current on law changes and find an experienced tax professional. The tax law is constantly evolving – major legislation, court cases and IRS rulings appear regularly. Many of these developments present positive tax opportunities for your company – if you know they exist, you can act more quickly and meet with your accountant to discuss any changes that might affect you or your business. Be proactive to claim applicable credits and deductions and keep your taxes as low as possible.

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Lisa Kahn Grossman is an associate principal in the Entrepreneurial Services department of Kaufman Rossin. She works with entrepreneurs, high-net worth individuals, and nonprofits. She is a certified QuickBooks ProAdvisor, a licensed Certified Public Accountant in the State of Florida, and a member of both the American Institute of Certified Public Accountants and Florida Institute of Certified Public Accountants.