Oct 07, 2021Actionable Tips on Reducing Taxable Income
Unfortunately, many small businesses in the United States are overpaying taxes. Considering the U.S. tax code is around 70,000 pages long, it’s understandable. However, overpaying taxes can have a negative effect on profitability after several years.
We understand that entire books, courses, and even college degrees can be dedicated to the strategy of reducing taxable income. However, the principles are simple. This article will walk you through a few basic practices and principles that will increase your ability to keep money in your pocket during tax season.
- Pay attention to Adjusted Gross Income
AGI is one of the most critical numbers when calculating taxes. Many tax breaks, limitations, and additional taxes are calculated using AGI. For example, you’ll avoid .9% Medicare tax on earned income if your AGI does not exceed $200,000 for single individuals, or $250,000 if married and filing jointly.
#2. Reimburse Using and Accountable Plan
Businesses may need to reimburse employees for travel expenses, dining, and supply purchases. Before this is done, make sure you use a reimbursement plan that meets IRS standards. This is called an accountable plan. In this option, businesses avoid reimbursing employees with funds marked as income. This can save a company money in employment taxes and lower overall taxable income.
#3. Watch for Carryovers
Some deductions and credits aren’t able to be used fully in the year they are accrued. Instead, they carry over to future years. Carryovers are an excellent way to reduce taxable income. Many tax preparation programs enable you to earmark potential carryovers, reducing the chance that you’ll forget about them in later tax seasons.
#4 Use tax-free ways to extract income
Salaries, bonuses, and distributions are all taxable. However, there are ways to reduce tax liability from these disbursements. Consider talking to your accountant about alternative benefits like medical coverage, health savings, and retirement plants. Of course, this doesn’t eliminate the competitive advantage of offering bonuses and increases, but when balances with alternative benefits, you could reduce overall taxable income.
#5 Do year-end planning
While tax planning is ideally a year-round activity, you can achieve important savings by rekindling the discussion toward the end of the year. Having an accountant as another set of eyes in this meeting can greatly increase the potential tax savings. Many people opt to complete their own taxes, or avoid paying for tax planning services in order to save money. However, tax planning generally pays for itself, as accountants have more experience reading and understanding tax code and applying it to a variety of industries.
If you’re interested in reducing your overall taxable income, reach out to our advisors today. We have years of experience saving companies thousands of dollars. We’d love to do the same for you.