There are three ways to keep this year’s and all future years’ tax bills down. Find out how to reduce taxes with the 3D’s:
- Deduct
- Depreciate
- Delay
They are obvious, but some business owners do not focus on them enough, and some do not plan well enough ahead, so even though they “deduct” they do not “depreciate” or “delay” to the extent that they can.
Deduct
Everyone knows that tax is calculated on profit and on income. Everyone also knows that there are standard deductions that may come into play, and thresholds that have to be exceeded before a certain tax rate applies.
When it comes to tax on profit, the company’s trading profit gets reduced by necessary overheads. That lower figure can be reduced even further by taking some of that net profit figure and investing it in an IRS-approved savings program.
Trading profit can also be legally reduced in other ways. One simple example is to buy some of next year’s office supplies at the end of this year. Another way is to subcontract some admin, marketing, or cleaning activities, to say, family members.
Many small business owners work late doing basic things. Stuffing envelopes for the next mail shot, checking the incoming emails from the company’s website, filing paperwork, or just vacuuming the floors, are all examples of simple jobs that someone has to do. By getting your children to do these, you can pay them. The money stays in the family, your children are contributing, the business’s costs go down, and so does the tax bill.
The list of deductibles is a long one. Seek professional advice on what to deduct will help you to save money.
Depreciate
Capital expenditure items get depreciated over an IRS-approved period of time. The IRS allows some items to be written off in one year, and some things get written off over a longer period. Your tax adviser will know how to make the most of these options.
Real estate improvements may be depreciated to reduce the tax bill. Land cannot depreciate, but the buildings, fixtures and fittings can. If the business owns the building or if the business owns, say, rental properties then these are depreciated, thus lowering pre-tax profits.
Delay
There are many ways to delay paying taxes. One is to invest some of the business’s pre-tax profit into personal IRAs. The business’s taxable profit goes down this year, thus reducing the tax bill, and the tax on that money will not be due until it gets withdrawn in some years’ time.
Real estate the business owns may be held in an IRA, so profits made on that real estate become due at some point in the future. Another way to reduce current taxes is through a 1031 Exchange. When an owned property is sold for a profit, if that profit goes on the next investment, the IRS will not tax that profit this year. 1031 Exchange rules and regulations are complex and have to be followed to the letter, which is why professional advice is essential.
The Take-Away
Deduct, depreciate and delay are the three primary ways business owners can reduce the current tax bill. By seeking appropriate professional advice, planning ahead, and by staying focused, taxes are legally kept lower than they would be.
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