How to Reduce Your Company Tax Liability

Running your business as an incorporated entity offers many benefits that you, as a business owner, may not be aware of.

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Nothing stings the wallet like tax season. The tips and advice in this article can help you mitigate that sting by lowering your overall tax burden. Paying less in taxes is a surefire way to increase your cash flow, enabling you to keep and invest more of your profits.

Incorporate your business

Incorporating your business is a mostly painless process that allows you to take advantage of tax breaks only available to incorporated companies. Before you incorporate, however, you should know a thing or two about the different types of business entities.

Sole Proprietorship

A sole proprietorship is the most common business entity, and as the name implies, it involves only one business owner. For example, if you own and operate any type of business on your own, you're considered a sole proprietor, and there’s no legal separation between you and your business

The problem with being a sole proprietor is that you are personally taxed on all gains made by your business in a given year. You are also personally liable for any claims made against your business. But if you incorporate your business, you can take a salary that is taxed based on employee tax rates. So you can essentially pay lower taxes on money you take as a salary. That’s why it’s smart to incorporate instead of staying as a sole proprietor.

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C Corporation or S Corporation: Which Is the Best One?

Corporations typically come in two different forms, either a C corporation or an S corporation. According to SBA.gov, the IRS defines an S corporation as "a unique entity, separate and apart from those who own it." In order to create an S corporation, you need to register the business in the state where the business is headquartered.

S Corporation

The main advantage of an S corporation is that you don't have to pay taxes on the profits or losses of your business. Instead, your company's shareholders pay income taxes on any of the shares they receive from the business. As the business owner, you can reduce your individual tax liability because the shareholders are required to pay all the taxes. Many business owners like this type of entity because they aren't subject to double taxation.

C Corporation

Incorporating as a C corporation enables your business to carry its losses forward. This means that if you lose $100,000 in your first year, you can apply those losses over consecutive years. So if you made $60,000 the next year, you could deduct any amount from your losses to decrease your tax liability.

Much like an S corporation, C corporations are considered separate entities from their owners. In a C corporation, the IRS taxes you at the corporate level and then taxes you again when the profits are distributed to the owners.

Claim the Employee Retention Tax Credit

If you have a corporation, it's likely you have some employees. Well, if you were in business during the COVID-19 crisis, you can get up to $26,000 back per employee with the Employee Retention Tax Credit. Find out if you qualify in our guide

Hire a tax professional

Once you’ve started a business, you have one of two choices: become a tax expert yourself, or hire someone to maximize your deductions. Unless you love tax law, our recommendation is to hire professional tax help.

Business taxes are complicated, but there are a ton of expenses you can deduct — office supplies, driving miles, travel expenses, the list goes on. Rather than try to keep track of all of this yourself, let the experts, or professional tax software, squeeze every penny back from the tax man for you.

Make charitable donations

A quarter of your taxable income can be deducted via charitable giving. In addition to reducing your tax liability, charity work can be a great opportunity to build trust in your community and increase your business reputation.

Hire contracted employees

Employees who do contract work allow you to get the job done while not having to pay employee taxes and healthcare costs. Plus, if you love the contractor you’ve worked with, you might decide to bring the person on full-time in the long run.

The Takeaway

We’ve listed a few of our favorite ways to reduce your tax liability and tried to pick options that were both effective and easy to implement. But we do recommend that any tax advice we’ve given be talked over with your attorney or tax specialist, as every small business has different needs and structures.

Related content

Reduce Your Tax Liability FAQ

How can an LLC avoid paying taxes?

If your LLC files taxes as an S Corporation (which you have to make an election for either 75 days after forming or in the beginning of the tax year) you pay no federal tax on taxable income and no employment taxes on distributions to shareholders. Your income is now considered to be "passive" instead of "earned" and this small distinction can help you avoid paying employment taxes and save you a ton of money.

How much does a small business have to make before paying taxes?

If you're a sole proprietor or independent contractor, you have to file taxes if you made more than $400 in a year. If your business operates as a pass-through entity, you will need to file if you make more than the current tax-free threshold: $12,950 for individuals and $25,900 for married couples filing jointly.

Disclaimer

At Business.org, our research is meant to offer general product and service recommendations. We don't guarantee that our suggestions will work best for each individual or business, so consider your unique needs when choosing products and services.

Andrew Mosteller
Written by
Andrew Mosteller
For four years, Andrew has been writing copy to help business owners expand, manage, and advertise their unique brands. His upbringing in an entrepreneurial family nurtured a passion for small business at a young age. Andrew’s father, an equity fund manager, taught him the ins and outs of investment financing and owning and operating a successful business. Now he brings his expertise and experience to entrepreneurs as a regular contributor on Business.org.
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