Business

Tax Planning for Small Businesses

While there are many advantages to running a Small Business, there are inherent pitfalls if it is not run efficiently and effectively. Tax Planning is a key element that needs careful attention. This is a year-round process with meticulous details being planned well in advance to maximize profit while minimizing taxes.

Every individual taxpayer and small business owner has complete liberty to choose how a financial transaction is carried out to result in the lowest legally permissible tax liability. To put it in other words, tax avoidance is completely legal, but tax evasion is not.

Small business tax planning basics should be well understood, and they should be supported by a Small Business accounting system that helps to minimize Small Business Taxes.

Small Business Tax planning starts during the entity selection stage before you even form your business. For example, which business structure you select will determine future tax implications. Whether you set up an S Corporation, set up an LLC, or choose another business structure, the business structure will be the basis for the amount of tax that you will pay on all future income.

Deductions and write-offs permissible for tax purposes should be understood and implemented during Small Business Tax Planning. The objective should be to maximize what you can deduct from the taxable income and write off by being aware of what counts as deductible expenses. This is very useful in Small Business Tax Planning because the question asked by small business owners very frequently is, “which expenses will be deductible as business expenses?”

The Internal Revenue Code Section 162 gives the answer, which has been tested and has determined many Court decisions – “In general there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” In this legal explanation, the two words “ordinary” and “necessary” assume great importance.

Simply put, any expense incurred by Small Businesses which are “ordinary” and “necessary” to run the given business is deductible from the gross income.

Some examples of deductible expenses:

Auto expenses – personal car used for business purposes and business vehicles;
Expenses related to business: advertising; utilities; office supplies and repairs;
Business entertaining: 50% of the cost to entertain present and prospective customers.

Taking into consideration all aspects of proper tax planning will usher the Small Business into prosperity.