Tax planning is an essential part of any business’s financial management strategy. As a business owner, it’s important for you to prioritize implementing effective tax planning strategies as part of a long-term plan to achieve financial success.
By analyzing the financial situation of your business, determining the strategies that are best suited to minimizing your tax liability, and working with experienced tax professionals to create a tax mitigation strategy, you can optimize your business’s tax situation—all while complying with federal and state tax regulations.
What Are the Benefits of Tax Mitigation Strategies for Businesses?
Taxes are a substantial expense for any business—and navigating federal and state tax law is no easy task, especially because the courts, federal and state regulators, and political parties are constantly updating the law. Due to the complex tax system and the amount of business capital at play, businesses of any size must prioritize tax planning.
Tax mitigation is the process of ensuring your business is taking full advantage of legal financial incentives so that you don’t pay more in taxes than you should.
Creating a long-term tax mitigation strategy can have numerous benefits for your business:
- Reducing taxable income
- Increasing cash flow
- Improving profitability
- Minimizing risk and avoiding potential tax issues
- Achieving full compliance
By implementing a tax planning framework involving tried-and-true tax mitigation strategies, you can optimize the tax position of your business and ensure you fulfill your federal and state tax obligations—without overpaying.
The Risks of Aggressive Tax Mitigation
While tax planning and mitigation strategies can lead to significant potential savings, it’s crucial to ensure you are operating within the scope of the law. The benefits of tax mitigation can outweigh the risks of an audit for many businesses, especially those companies that are already likely to be audited. It’s up to each business owner to determine whether the savings justify the risks.
To avoid IRS fines, audits, and reputational damage, regularly review your business’s tax-related risks and ensure you are following federal and state tax laws—and that you have the documentation to prove it. An experienced tax accountant can help make sure your business is following ever-changing tax laws and regulations.
8 Tax Mitigation Strategies for Businesses
Tax mitigation strategies—such as restructuring your business entity, paying for expenses with pre-tax dollars, generating tax-free income, and taking advantage of any available tax deductions—use existing advantages in federal and state tax codes to minimize your tax burden and save money for your small business.
Consider both the risks and benefits of these tax mitigation strategies and talk to your tax accountant to see how you can develop an efficient tax plan.
1. Reconsider Business Entity Type
The entity type of your business significantly impacts your tax liability, and it may be beneficial to your bottom line to restructure your business.
As your business grows, consider changing your business entity type. If you are a sole proprietor, should you incorporate as a Limited Liability Company (LLC)? Would it make more sense for your LLC to file as an S-corporation or C-corporation?
Talk to an experienced tax professional or accountant to determine the most appropriate structure for your business.
2. Keep Track of Business Losses
Business losses can be deducted from income, which in many cases lowers the overall taxable income for your business. Keep careful track of these losses to reduce the amount of taxes you owe by potentially hundreds or thousands of dollars.
3. Take Advantage of Tax Deductions
Tax deductions—which reduce the amount of taxable income—are a helpful way to minimize overall business tax burden. Talk to your accountant to see what tax deductions are available to your small business. For example, if you recently opened your company, there are a few deductions that may be able to help you navigate start-up costs.
4. Include All Business-Related Expenses When Filing
Properly accounting for all business-related expenses when filing taxes can reduce your taxable income. Don’t forget about expenses such as utilities like high-speed internet or the rent you pay for your office or warehouse space.
5. Leverage Tax Credits
Tax credits minimize the amount of tax owed (as opposed to tax deductions, which reduce taxable income), and there are several tax credits small businesses can leverage, depending on their unique financial situation. For example, the Work Opportunity Tax Credit (WOTC) benefits employers who hire individuals from certain groups who have historically faced employment barriers.
Other tax credits include Disabled Access Credit (DAC), which offsets some of the costs of improving accessibility for people with disabilities, and tax credits for employees who provide health insurance benefits to their employees.
6. Offer Fringe Benefit Plans to Employees
Raising employee wages may increase the amount of employment tax you are responsible for. One way to offer employees additional compensation without triggering higher employment tax costs is to provide tax-exempt fringe benefits, such as medical and dental insurance, childcare assistance, tuition reimbursement, meals, transportation, group term life insurance, or long-term care insurance.
7. Stay Up to Date on Business Tax Law
Tax law is constantly changing. For example, Moore v. United States, a pending US Supreme Court case, could have far-reaching implications on federal tax policy and small business capital. Staying up to date on tax law is important for the owners of any business, no matter what size or industry.
You don’t need to become an expert on tax law. However, paying attention to tax-related news headlines is a good start. Your tax advisor or accountant can also help keep you on top of relevant updates to tax law.
8. Hire an Experienced CPA
The best way to lessen the amount of money your business owes in taxes is to consult with a certified public accountant (CPA) who is experienced in tax law.
Taxes are complicated, and mistakes in the filing process or missed tax deadlines can result in costly penalties. A knowledgeable CPA will ensure your taxes are calculated correctly and make sure you are not overpaying. Based on the unique financial situation of your business, they may also be able to recommend strategies you can follow to lower your tax burden.
Contact Fisher, P.A. to Create a Business Tax Mitigation Plan
Do you need assistance creating a tax plan for your business? Our accounting experts can help you navigate tax season, minimize your tax burden, and achieve long-term financial success.
At Fisher, P.A., our team of experienced accounting professionals is ready to answer your questions, walk you through our small business accounting services, and show you how to grow your company. We cater to businesses of all sizes throughout the United States, aiming to alleviate the burden of accounting from your shoulders.
Our skilled team is ready to get to work so you can get back to doing what you do best: running your business. Call us at 704.332.7800 or fill out our contact form today to schedule a consultation.