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Two Ways to Reduce Your Small Business’s Income Tax Liability

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Whew! The headache of filing our 2015 income tax returns is over. But for small business owners whose bank accounts were hit extra hard, the pain isn’t over.

 

If you experienced an unwelcome surprise and had to write out a big end-of-year check to the IRS, you may be wondering, “What can I do to lower my tax liability for year 2016?”

 

While there’s no magical way to make your tax burden shrink, you could potentially benefit from making one or both of the following changes:

 

  1. Reinvest more of your profits into your company by buying things that will help you grow your business and run it more efficiently.

 

The more business expenses you have, the lower the taxable portion of your business income will be. But make smart decisions so you’re spending your hard-earned revenue on products and services that will truly make a positive difference in your business. For example:

 

  • Bring on a sub-contractor to help with bookkeeping, social media marketing, or another task that may be taking your time away from the things you do best.
  • Replace old, unreliable equipment (printers, phone, etc.) with new, fully functional devices.
  • Update your business cards and other print marketing collateral.
  • Give your website a facelift.
  • Invest in office renovations or remodeling to make your space more inspiring and functional.
  • Schedule a consultation with a tax professional or accountant to discuss how you can better manage your tax liability and maximize profits.

 

  1. Change your business’s legal structure.

 

If you’re a sole proprietor, you’re paying the 15.3 percent self-employment (Social Security and Medicare) taxes on all of your taxable business income. That can add up to a big chunk of change. By changing your business structure from a sole prop to an S Corporation, you might potentially decrease your tax bill.

 

With an S Corp, you have the option to take a portion of your profits as your salary and the remaining amount as a distribution. An S Corp only pays self-employment taxes on the salary portion of its profits. So, if your company made $90,000 in profit and you paid yourself a salary of $50,000, the other $40,000 would not be subject to self-employment taxes. Realize that you do need to issue yourself a reasonable salary that reflects the market rate for the services you provide to your business. You could land in trouble with the IRS if you try to game the system by paying yourself a ridiculously low salary in an attempt to avoid paying self-employment taxes.

 

Don’t Go It Alone

Before making any significant changes to how you operate your business, consider talking with tax, accounting, and/or legal professionals for expertise and guidance. SCORE mentors can help connect you with reputable experts in those fields—and they can help you with the many other aspects of starting and running a small business. What are you waiting for? Contact SCORE today.

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