Small Business Tax Reduction Strategies

Small business owners, like everyone else, have to file returns and pay taxes. While not enjoyable, there are ways to reduce your tax burden by implementing certain pro-active measures, rather than scratching your head at year’s end, trying to uncover hidden deductions.

Where ever possible, employ family members. Taxation laws are friendlier to small business owners than for big corporate companies, and they are even more supportive when a small business is owned and run by the family. If you employ your spouse or parents, you won’t have to pay federal unemployment taxes, and you are not required to make deductions for income tax and social security from the paychecks, if you employ your children.

Hiring independent contractors absolves you a host of responsibilities which you would otherwise have to bear with a regular employee, including paycheck deductions for state and federal income taxes, employer contributions for social security, Medicare and unemployment benefits.

Create a list of standard and widely availed of deductions for your business and sector. Maintain records, classify everything as per category and make sure you do not have to go through a mess at year’s end. If necessary, hire a consultant to advice you on available deductions and use accounting and tax software to maintain records. The savings generated by the increases tax deductions year after year will pay for the cost of the software and consultancy very quickly.

Clear all pending bills just before the year end. If some bills meant to pay for expenses incurred in the current year are due early in the following year, paying them before the year end will help increase deductions available in April. The same applies for equipment purchase, upgrades, maintenance or expenditures which you might have planned for sometime in the following year. Fast tracking these expenses and paying for them immediately will allow you to take tax deductions for these purchases within a few months, rather than buying in the first quarter and having to wait for more than a year for the deductions.

Give obsolete or used equipment to charity, to be able to accept full tax deductions for the entire value of the charitable gift. Make sure the receiving organization is certified by the IRS to be able to receive tax deductible charity.

Make use of the Work Opportunity Tax Credit (WOTC) program, under which you are eligible to receive federal tax credits for hiring employees from certain groups of people with a high unemployment rate. These groups include, but are not limited to, veterans, ex-felons, high risk youth groups and most recently, hurricane Katrina victims. Under this Welfare-to-Work program, small business owners are eligible for reductions in federal tax liability up to $9000 over a two year period for each qualified employee hired under this program.