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As the leader of a budding business, you’re likely spending most of your waking hours focusing on three main priorities — building your team, finding customers and perfecting your product. With barely enough time to address these key endeavors, it’s easy to let less pressing matters, such as tax optimization, fall by the wayside.
In the short term, this might seem like a harmless oversight. However, come tax season, you’ll wish you had done your research and understood just how many business decisions bring with them tax implications that affect your bottom line.
When it comes to taxes — both local and federal — there are countless quirks to take into account. For example, the City of Los Angeles has a revenue tax that can grab up to 1 percent of your gross receipts even if you weren’t profitable that year, while plenty of other cities would be more than happy to let you keep that money.
The better you understand how taxes can affect your business, the more proactive you can be about boosting your company’s bottom line.
In another example, on the federal level, if you’re a qualified C corp, you can create tax-exempt appreciation for your shareholders through the use of qualified small-business stock, which may be a benefit if you’re looking for new capital. Similarly, financing with SBA loans instead of private sources can give you access to a number of bottom-line boosters, including potential incentives at the local, state and federal levels.
Paying attention to these factors has literally saved my company millions of dollars over the years. For example, back when we were looking to expand our operation to a new state, our real estate team informed us that we could obtain a seven-figure incentive package from the City of Austin, Texas, if we chose to open an office there. We were already attracted to this city for different reasons, but learning about this tax break definitely sealed the deal.
Here are four areas every tax-savvy business leader should become intimately familiar with:
1. The Wide World of Deductions. A substantial amount of your business expenses may qualify as tax-deductible — and you may not even realize it. According to the IRS, to qualify as a business deduction, an expense must be ordinary and necessary. Depending on what is deemed ordinary and necessary in your field, your cell phone, your car, and even the meals you buyfor sales leads could qualify.
2. C Corps vs. S Corps. Even if you’re structured as an LLC, you can elect to be taxed as an S Corp. This allows you to avoid paying federal corporate income taxes, and your income, credits, losses and deductions are instead passed to your shareholders. This move could potentially save you thousands of dollars every year.
3. Employees vs. Contractors. Do you pay your workers as employees or as contractors? It may be cheaper and less of a hassle to pay your workers as contractors, as long as you can structure their roles to meet the IRS’s definition. Study up, and act accordingly.
4. Retirement Savings. Any wage earner can contribute to a qualified retirement plan and receive a deduction up to the annual limit. Business owners who set up their own retirement plans, however, can contribute and deduct substantially more — $53,000 to a solo 401(k) plan in 2016 and up to $59,000 if they are at least 50 years old. For most business owners, a deduction that large would result in tens of thousands of dollars in tax savings.
It may be an old saying, but it makes perfect sense as a business tax mantra: It’s not what you make, it’s what you take home. Why pay more in taxes than you have to?
The better you understand how taxes can affect your business, the more proactive you can be about boosting your company’s bottom line — and the better you’ll feel come tax season.