Owning your own business doesn't just give you control over your own destiny. It also provides you flexibility in determining your tax liability and how much money you need to send to the Internal Revenue Service each year. Good tax strategies can help to both maximize your company's profits and personal income while reducing your overall income tax bill. Here are just a few strategies that business owners are able to use every day:
If you buy a car for your business, you can write off the out-of-pocket expenses, but your annual depreciation is limited based on your purchased cost. Lease payments, on the other hand, are almost fully tax deductible to the extent of your business use. If one believes that leasing is a better economic deal, then leasing your business vehicle may produce the best after tax approach.
Hiring your children as employees in your business will not only help reduce your tax liability, but will provide them with an inside view of how the family business works, and provide them with an appreciation of the value of hard work. When hiring your children they will be able to offset their earned income to the extent of their standard deduction without paying tax. Children are also exempt from federal unemployment taxes and, if the family business is not structured as a corporation, the compensation paid to them will be exempt from the employee and employer shares of FICA, as well.
If you travel and engage in both personal and business activities, you may be able to deduct your travel costs so long as the trip is primarily related to your business. Many people and organizations will set up out of town meetings or conferences later in one week and finish early the next. This type of schedule requires you to be in town, but allows you to have the weekend for yourself.
Depending on how you structure your business, you may also be able to reduce the tax liability on the income that you earn. When operating as a pass-through entity such as an LLC or general partnership, your entire net income is generally subject to income and self-employment tax. When operating as an S corporation your net income is subject to income tax, but only your wages will be subject to the FICA and Medicare taxes. Additionally, distributions you receive are generally not subject to income taxes to the extent of your previous taxed earnings and your basis in the stock. Choosing the right type of entity and the right mix of distributions and salary can help you reduce what you pay in taxes without increasing your risk.