By Debbie Gregory.

Every year tax season comes around filled with the same major questions including:

• How much will I have to pay?
• Why do I have to pay so much?
• How can I reduce my tax liability?

No one wants to pay one dollar more in taxes than necessary.  Finding legitimate ways to lower your taxable income is something that is very important to your business. A lot of business owners end up paying more than they should due to the simple fact that they missed out on certain deductions. However, if you consider that the U.S. tax code is approximately 70,000 pages long, it’s understandable why small business owners have challenges.

Ways to Save Paying Taxes for Small Businesses:

1.) Make Smarter Tax Deduction Choices:

Being strategic about your business expenditures can help lower your taxable income. For example, an established company purchasing a large dollar piece of equipment can deduct the entire cost of acquiring the machinery or equipment. However, a start-up would be better off spreading out the value of the purchases across your future tax years instead of deducting the full purchase price all at once.

Other deductions to consider:

• Vehicle expenses (based on actual costs)
• The IRS mileage allowance(currently 58 cents per mile)
• Home office expenses (based on actual costs), or you can use the IRS simplified rate (which is currently $5.00 per square foot up to 300 square feet of space)
• Claiming disaster losses on prior year returns rather than on the return for the year in which the disaster occurs
• Your business insurance expenses

2.) Carryover Deductions:

Certain deductions and credits have limitations that can prevent you from using them fully in the current year, but carryover the remaining amount to future years. Keep track of any carryovers so that you won’t forget to use them in future years.

Examples of these include:

• Net operating losses (limited to 80% of taxable income)
• Home office deduction
• General business credits
• Capital losses
• Charitable contribution deductions

3.) Change your Business Structure:

If you are currently doing business as a sole proprietor or partnership, it may be time to look at a new business structure. Many small businesses choose to do business as an LLC (Limited Liability Company), or a “pass-through entity”, since it may offer more flexibility on how income can be taxed.

4.) Adjusted Gross Income (AGI):

A number of tax breaks, limitations, and additional taxes are based off of the Adjusted Gross Income (AGI), or the Modified Adjusted Gross Income (MAGI), which for some is the same as the AGI. Keep a close eye on taxes taken out of the income, some may not be relevant to your business at all.

5.) Use Tax-Free Ways to Extract Income from Your Business:

Items such as your salary, bonuses, and any distributions of business profits are taxable.   There are other ways that may allow you to possibly benefit from your business’s success without necessarily triggering tax liability.

Items such as:

• Tax-free fringe benefits, including items such items as medical coverage or retirement plans
• Loans made to you by the business on a no or low-interest basis

Please stay tuned for Part 2 of this series with five more ways for small businesses to reduce or save on taxes.