Tax season is right around the corner, and this is the perfect time to take stock of profits, losses, and income and start preparing to file tax returns. For small businesses, all these are included in personal tax returns. Small businesses usually refer to single-member LLC owners and sole proprietors. Since most of these businesses are not full-fledged corporations, they do not pay their taxes at the business rate. Small business taxes are filed under Schedule C along with Form 1040.

For individuals, the highest tax rate is 39.6%; depending on the income, a small business will have to pay taxes on this tax rate. Adding local and state taxes, small business taxes could go up to nearly 50%. This is quite a high percentage of tax a small business would have to pay as compared to a corporation that would be paying at the tax rate of around 35%.

Most small business owners are not aware of certain deductions they are eligible for and miss out on tax-efficient ways of business management and retirement savings. Although the amount of small business tax depends on the ownership and type of business, it is possible to reduce the amount of small business tax an owner pays. Here are a few ways in which small business taxes can be reduced to a great extent.

• Utilize tax-free methods to save on taxes: It is possible to save on small business taxes by utilizing tax-free benefits such as retirement plans and medical coverage that is offered to employees. It is also possible to save taxes on loans taken on a zero or low-interest basis. Loan interests that are below IRS-set rates have to be reported; however, this does not cost too much due to low-interest rates at present.
• Make use of accountable plans: An accountable plan is a plan used by employers to reimburse employees for their entertainment, travel, and other costs. This plan adheres to the requirements of IRS. Accountable plans allow a small business to deduct from the total expenditure by flagging reimbursements such as employee income. This lowers the total taxable income of the business and saves employment taxes of the company. Accountable plans not only help employers but also employees to save on taxes.
• Don’t ignore carryover deductions: In many cases, small businesses can be eligible for credits and deductions based on their taxes. However, there are limitations imposed on such credits, due to which a business cannot utilize these completely in the present financial year. Such credits and deductions are carried over to consecutive financial years. It is essential to keep track of such credits and deductions that are carried over. This can help in incurring the benefits of such carryovers. Carryovers are usually earned through capital losses, charitable contribution deductions, general business credits, home office deductions, and net operating losses.
• Watch out for tax-free fringe benefits: With extra wages for employees, the employment tax expenditure paid by the business also increases. However, a business can save on this expenditure by paying for fringe benefits for employees. Many fringe benefits can exempt small business from paying additional taxes. These benefits help save on the taxable income of the benefits. Tax-exempt benefits include the following: health benefits, long-term care insurance, group term life insurance, disability insurance, educational assistance, dependent care assistance, transportation benefits, and meals provided to employees.
• Change the structure of the business to an LLC: Most small businesses that are set up based on a partnership or sole proprietorship pay small business tax on the personal income of the owner/owners. In such cases, FICA taxes also have to be paid as part of the small business tax. This is because FICA applies to any salary earned by an employee (in a small business based on sole proprietorship, the owner is treated as an employee as well). Restructuring a business to an LLC (Limited Liability Company) channels a major part of the business income through the distribution of business income. FICA taxes are not applicable to this income, and the business can save a lot on taxes.
• Direct profits towards retirement plans: If a small business has limited number of employees, establishing retirement plans for employees can be beneficial for the employer. Setting up employee return funds can qualify a small business for tax credits. The profits of the business can be channeled to the employer’s contribution towards the retirement plans. The contribution made by an employer towards employee retirement plan is tax deductible. With a retirement plan, such as 401k or any simple tax-deferred retirement plan, employees can use the flexibility and option to save for retirement and employers can save on overall small business taxes.

These are just a few ways to save on small business taxes. By taking advantages of opportunities and tax breaks, small businesses can easily lower their overall taxes. In case of difficulty in navigating through the expansive and extensive tax regulations and rules, it is best to consult an accountant who can help in saving money on taxes.