What do the holidays mean for business owners? While the rest of us may be gathered around the fire singing Christmas carols, small business owners are trying not to get heartburn over the thought of year-end taxes. All that eggnog doesn't help. Here are six ways you can save on taxes this year, so polish off that eggnog and have another cookie. (For related reading, also check out 5 Traits Of A Successful Small Business.)
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- Incorporate in Another Region
Though the term "foreign corporation" may sound a little scary, don't be alarmed. The term simply refers to any corporation that does business in a region other than the one in which it was incorporated. For example, if you live and run your small business in Tennessee and you incorporate your business there but also do business in Missouri, Alabama and elsewhere, you are a domestic corporation in Tennessee and a foreign corporation in any other state.
Since some states have more lenient laws and better small business tax breaks than others, many corporations - both big and small - choose to be a domestic corporation in those business-friendly states and a foreign corporation everywhere else. As long as you follow all the legal procedures required for incorporation, you can incorporate in any of the 50 states or in the District of Columbia. Business-friendly states with the best tax advantages, according to a U.S. News article, include Washington (low taxes), Virginia (low consumption taxes), Texas (low worker's compensation costs, no income or capital gains tax for individuals) and Florida (low corporate tax rates). (For more on this topic, see Where Should Your Small Business Incorporate?)
- Create an Umbrella Company
An umbrella company is one corporation, with one company name, which is the "parent company" of all your individual start-ups and ventures. An umbrella company could be an LLC or another type of corporation, and you can change the type of corporation for your umbrella company without messing around with the paperwork or status for your individual ventures.
Having an umbrella company can also help you simplify and save on taxes. When all your business ventures are brought together under an umbrella company, your umbrella company records all profits and losses, and pays taxes on all of it - once. Keeping up with the paperwork for one (umbrella) company is certainly easier than doing taxes for five (smaller) companies, and you can end up saving on taxes too. If once of your ventures is doing great, raking in the profits, but another is sinking under the weight of first-year expenditures, you'll get to see those things balance out when you pay taxes once, because they'll both come under the umbrella company.
- Invest in Business Insurance
If you're a very small business, you may think that business insurance is an unnecessary expense and one you can't quite justify until you're in the black. However, consider the benefits of that monthly payment. First, the insurance can save you if disaster does occur. If you have to pay out of pocket to cover a burglary, fire or car wreck that affects company property, that's not going to help you get in the black. Secondly, those monthly premiums are tax-deductible. A lower tax rate at the end of the quarter can help you pull into the black.
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- Sell Off the Inventory
Inventory costs you anytime it's just sitting around taking up space and requiring upkeep. The purpose of inventory is to move out of your hands and on to your customers. As the end of the year approaches, get rid of the dead weight of excess inventory and you'll not only save money on the cost of upkeep, you'll also save money on taxes. Start by offering inventory items at a significantly reduced cost; anything that doesn't sell at a discount can generally be deducted as slow-moving or excess inventory. Or you can donate excess inventory to a charitable organization for a tax deduction.
- Make Some Upgrades
Before the year is over, go ahead and buy that new equipment you need or make some improvements to your retail store or restaurant or to realty that you lease; two current tax breaks can make these investments worthwhile. Usually you're required to spread the deductions for new equipment, machinery or improvements out over a number of years; however, the first-year expensing rule allows you to deduct up to $500,000 of the cost of new equipment or machinery or real estate improvements. Also, there's a special bonus depreciation method available that allows you to deduct half the cost of what you've purchased and the other half through normal depreciation.
- Get a Second Opinion
Small business owners may be hesitant to claim deductions because they feel like it's trying to cheat they system. But deductions are there for a reason, and having a CPA on your side can help you figure out the smart moves to make so that you cut all the costs you can, including tax costs. There's nothing noble about paying taxes you're not legally required to pay.
If you're asked your business accountant about more ways to cut tax costs and haven't gotten much help, you might want to get a second opinion. Taxes are complicated and so is the law. Find another expert, preferably one qualified in both tax preparation and tax law, and ask again. You might be pleasantly surprised by the answer.
The Bottom Line
Taxes are certain, that's for sure; but you certainly don't have to assume that the highest possible tax rate is a given for your small business. Keep good records and use them, and you'll be able to deduct these valid costs and end up with a better tax rate for 2010, and a better start to your 2011 business year. (For more reading on this topic, see 5 Expensive Small Business Mistakes.)
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