Tax Saving Strategies For Small Businesses In North America

As a small business experiences an uptick in income, its tax liabilities also rise. To avoid getting caught off guard by hefty bills, small business owners must take a proactive approach to tax planning.

Even with changes to federal tax laws in 2017 that affected individual deductions, small business owners still have various tax breaks available.

Small business proprietors naturally focus on strategies for minimizing their business taxes. From capitalizing on available credits and deductions to strategically timing revenues and expenses, many year-end tax planning approaches exist to lessen the overall tax burden effectively.

Explore these impactful tax strategies to streamline your small business finances today. From fine-tuning home office deductions and maximizing retirement contributions to debt reduction, these measures can make a tangible difference in saving money for your business.

Read on to know more!

Tax Saving Strategies for Entrepreneurs

Defer your income

To lower your taxable income, consider deferring some of your earnings.

It's essential to remember that income tax is assessed based on the previous calendar year's earnings. While a successful sales strategy can boost your income, it also raises your tax liability. To ease your tax burden come April, consider postponing the recognition of some income until the following calendar year.

By postponing invoicing a client for services performed in December 2024 until January 2025, you can shift the income to the following year, potentially lowering your 2024 tax bill.

Conversely, accelerating income into the current year could be advantageous, especially if you foresee upcoming tax rate increases. In this scenario, sending an invoice and securing payment from your client in 2024 ensures that more income is taxed at your existing tax rate.

This principle extends to expenses as well. If you are in a high tax bracket this year, accelerating expenses in 2024 can effectively reduce your taxable income. 

Delaying income and hastening expenses becomes strategic when:

• Your 2024 income is exceptionally high, propelling you into a higher tax bracket.
• Anticipate an increase in tax rates in 2025.

Accelerating income and postponing expenses is beneficial when:

• Your 2024 income is unusually low, and you aim to capitalize on paying taxes in a lower bracket.
• You anticipate a decrease in tax rates in the upcoming year.

Get over with the Debts

Efficiently managing your business's debt can have tax implications worth considering. Many small business owners opt for loans to fuel their expansion, and while the principal portion of loan itself is not deductible as an expense, the interest payments are deductible which can lower your net income and consequently taxes. Seeking advice from a CPA or accountant can guide you in making your loan as tax-efficient as possible.

Simultaneously, addressing any uncollectible debts accumulated during the year is essential. Uncollectible or bad debts refer to amounts owed to your business by customers that you, as the business owner or a creditor, have been unable to collect.

Additionally, ensure that you write off any uncollectible debts before the end of the year. Identifying these bad debts can be done through an accounts receivable aging report, highlighting customers who haven't made payments. 

If a customer is no longer active, you may be able to remove their balance, counting it as uncollectible debt, reducing your income and subsequently lowering your income tax. However, it's important to note that you must reverse the deduction if the person pays you later, after the write-off.

Leverage Tax Benefits through Health Savings Accounts (HSAs)

Building a financial cushion for future healthcare needs is an intelligent approach to trimming your small business taxes. In the face of escalating medical costs, having extra funds reserved for potential medical bills can be a financial lifesaver. 

One influential avenue for achieving this is a Health Savings Account (HSA), specifically if you are enrolled in an eligible high-deductible health plan.

For self-employed individuals, there's often the added advantage of deducting health insurance premiums for themselves, their spouses, and children up to age 27.

With an HSA, you contribute pre-tax dollars (income not yet subject to taxation), reducing your taxable income. Withdrawals are tax-free, provided they are used for IRS-defined "qualified medical expenses." Additionally, the account's interest or other earnings grow tax-free over time. 

In 2023, the contribution limits stood at $3,850 for individual coverage and $7,750 for family coverage under a high-deductible plan.

An appealing feature of HSAs is that the funds in your account roll over from year to year and do not expire, providing a sustained financial resource for your healthcare needs.

Prepare for a Retirement Plan

Putting money into your retirement plan isn't just a good way to save for the future – it's also a smart move to get some instant tax benefits. When you contribute to a 401(k), you're using money from your paycheck before taxes are taken out. This means your monthly salary goes down a bit, and as a result, you end up paying less in taxes.

In 2023, you could contribute up to $22,500 to a 401(k); if you have an IRA, the limit is $6,500. If you're a business owner, setting up 401(k) plans for your employees helps them and can also improve your tax situation. Small businesses can even claim some of the costs for starting and managing these plans, getting up to $500 per year for the first three years as added financial relief.

Starting a 401(k) or SEP (Simplified Employee Pension) doesn't just let you save for retirement; it also gives you a tax break. You can deduct the contributions you make, and there's even a chance to get a tax credit for the startup costs of the plan. This credit is available to employers who meet certain conditions, like having fewer than 100 employees with at least $5,000 in compensation, having at least one participant who isn't a high-income earner, and not having another company retirement plan in the last three years.

The credit is valued at 50% of the plan's startup costs, with a maximum benefit of $5,000. This dual strategy enhances your retirement savings and offers valuable tax advantages.

Maximize Tax Savings by Onboarding Family Members

Employing family members can be a powerful strategy for small businesses aiming to optimize their tax position. The IRS provides a range of options that allow companies to benefit from this approach, presenting unique advantages that can significantly reduce tax liabilities. Here's how hiring family members can be a tax-savvy move:

Children's Employment

Tax Efficiency: Hiring your children offers a notable tax advantage. Income paid to your children is often subject to a lower marginal tax rate, and in some cases, the tax liability may be eliminated.

Social Security and Medicare Tax Exemption: In the case of a sole proprietorship, your child's wages are not liable to Social Security and Medicare taxes, further enhancing the tax efficiency of this arrangement.

Business Justification: It's crucial to ensure that the earnings paid to your children are justifiable for legitimate business purposes, as the IRS requires a bona fide business reason for their employment.

Spousal Employment

FUTA Exemption: Hiring a spouse can also yield tax benefits, as the earnings are not subject to the Federal Unemployment Tax Act (FUTA), providing additional savings for the business.

By strategically incorporating family members into your business operations, you foster a sense of unity and capitalize on these tax-saving opportunities. 

It's essential to navigate these arrangements carefully, ensuring compliance with IRS regulations and substantiating the business rationale behind each family member's role to maximize the tax benefits while maintaining the integrity of your business practices.

Save on Travel Expenses

Efficiently managing business travel can lead to substantial tax savings. You can reduce your tax spending by deducting the expenses related to your work-related travel. Here's how you can make the most of it:

Deductibility of Business Travel Expenses

Complete Deduction: Expenses incurred during business trips are entirely deductible, providing a means to reduce your taxable income.

Strategic Combination of Business and Personal Travel: To maximize deductions, consider incorporating personal travel with a legitimate business purpose. This ensures the deductibility of expenses related to the business portion of your trip.

Utilizing Frequent Flyer Miles Wisely

Accumulating Rewards through Credit Card Usage: Earning frequent flier miles through credit card rewards during business travel is a valuable benefit.

Appropriate Redemption for Personal Travel: Given the non-deductibility of personal travel expenses, consider utilizing earned frequent flier miles for personal trips. This allows you to derive value from accrued rewards while maintaining the deductibility of business-related travel expenses.

Implementing these strategies requires meticulous documentation and adherence to tax regulations. By integrating these practices into your approach to business travel, you can enhance tax efficiency without compromising compliance.

Take Advantage of Tax Credits

Tax credits help directly lower the taxes your business owes. Contrary to tax deductions that lower your taxable income, tax credits directly reduce the tax bill. Here are a few you might want to consider:

Work Opportunity Tax Credit (WOTC)

What it does: Helps employers hire and keep individuals facing employment barriers.

Who qualifies: People from specific groups like TANF recipients, felons, and veterans.

How much: Up to $2,400 per eligible new hire.

How to claim:

• Hire eligible individuals.
• Complete Form 8850.
• Submit it to the state agency within 28 days of the new hire's start.
• Claim the credit on your next tax return once eligibility is confirmed.

Disabled Access Credit (DAC):

What it does: Assists small businesses in covering expenses related to making their spaces accessible for people with disabilities.

Who qualifies: Businesses with revenue of $1 million or less and fewer than 30 full-time employees.

How much: 50% of up to $10,000 in eligible expenses (excluding the first $250).

How to claim: To claim it, eligible businesses should document qualifying expenses, complete IRS Form 8826, attach it to their business tax return, and file by the deadline to reduce overall tax liability.

Credit for Small Employer Health Insurance Premiums:

What it does: Offers credit for small businesses providing health insurance to employees.

Who qualifies:

• Companies having fewer than 25 full-time equivalent employees.
• Average wages were under $62,000 per year per full-time equivalent in 2023.
• Buy group health insurance from the Small Business Health Options Program Marketplace (SHOP).
• Pay a minimum of 50% of the cost of employee-only coverage for each employee.

How much: Up to 50% of the premiums paid during the year.

How to claim: Qualify for two consecutive tax years by meeting the outlined criteria.

These tax credits provide tangible benefits for your business, so explore and take advantage of the ones that apply to your situation.

Importance of Tax-Saving Strategies

The importance of tax-saving strategies lies in their potential to impact an individual or business's financial well-being significantly. These strategies are designed to legally and ethically minimize the amount of taxes paid, allowing for increased savings, investment, and overall financial flexibility. 

These saved funds can be directed toward investments, savings accounts, or other wealth-building avenues.

Here are some reasons why you should work on those Tax-Saving strategies:

Enhanced Cash Flow: Effective tax planning results in improved cash flow due to reduced tax payments. This additional liquidity allows for better day-to-day financial management and increased capacity for investments or business growth.

Compliance and Risk Mitigation: Implementing tax-saving strategies ensures adherence to tax laws and regulations. By staying compliant, individuals and businesses mitigate the risk of penalties, audits, or legal issues, contributing to overall financial stability.

Investment Opportunities: Savings from tax-efficient strategies can be redirected towards investments, fostering the potential for capital appreciation and long-term financial growth. This aligns with a proactive approach to wealth creation.

Business Competitiveness: For businesses, adopting effective tax-saving strategies can enhance competitiveness by optimizing costs, improving profitability, and enabling more strategic financial decision-making.

Strategic Resource Allocation: Tax-saving strategies empower individuals and businesses to allocate resources towards areas that align with their financial goals. This may include expanding operations, hiring talent, or investing in innovative projects.

Retirement Planning: Incorporating tax-saving strategies is crucial in retirement planning. Individuals can potentially secure a more financially stable retirement with adequate savings by minimizing tax liabilities during the earning years.

Economic Stimulus: On a macroeconomic scale, widespread adoption of tax-saving strategies can contribute to economic stimulus. Increased spending and investment can stimulate economic growth as businesses and individuals retain more earnings.

Tip: Consulting with financial advisors or tax professionals can provide personalized guidance tailored to specific circumstances and goals.

How can virtual assistants help with Tax Savings?

Virtual assistants are crucial in facilitating tax-saving initiatives for individuals and businesses. These professionals, working remotely, bring various benefits to the table.

• One key aspect is their assistance in meticulous expense tracking. Virtual assistants can efficiently categorize and organize business expenses, ensuring that all deductible costs are correctly accounted for during tax preparation. This meticulous tracking contributes to accurate financial records, optimizing tax-saving opportunities.

• Virtual assistants also excel in receipt management. Leveraging technologies like OCR, they digitize and organize paper receipts, reducing the risk of document loss and facilitating seamless retrieval during tax filing. This helps individuals and businesses maintain a comprehensive record of expenses.

• In addition to managing receipts, virtual assistants can send timely reminders for invoicing clients or customers. This proactive approach ensures a steady cash flow, and income is appropriately recorded in the relevant tax year, aligning with tax-saving strategies.

• Virtual assistants can also assist in creating and maintaining budgets, identifying potential areas for savings, and aligning financial decisions with tax-saving goals. Their support in optimizing expenses and suggesting cost reduction measures contributes to overall financial efficiency.

• For businesses billing clients by the hour, virtual assistants can help track billable time spent on different projects. This accurate time tracking facilitates precise invoicing and potential deductions for time-related expenses, enhancing tax-saving efforts.

• Moreover, virtual assistants are adept at researching tax regulations and updates. They can provide relevant information to individuals or businesses, ensuring compliance and identifying opportunities for tax savings based on the latest legal provisions.

• By integrating with accounting software, virtual assistants automate bookkeeping tasks. This includes recording transactions, reconciling accounts, generating financial reports, streamlining the tax preparation process, and contributing to overall tax efficiency.

• Virtual assistants also contribute to effective communication management with tax professionals. They ensure timely responses to queries and facilitate the exchange of necessary documents, fostering a smooth collaboration between businesses and tax advisors.

Wishup: Helping You Maximize Tax-Saving Potential

Wishup stands out as a platform that connects entrepreneurs, startups, and small businesses with meticulously screened and vetted virtual assistants tailored to assist with several administrative tasks such as data entry, bookkeeping, and customer service.

Our dedicated bookkeeping team, boasting extensive knowledge and hands-on experience, is fully equipped to meet all your bookkeeping requirements. Eager to apply their years of expertise, our bookkeeping assistants have successfully managed books for a diverse range of businesses.

What do we offer?

Top 0.1% Selection: Wishup exclusively hires virtual assistants from the top 0.1% of applicants globally. This ensures you can effortlessly choose a qualified candidate without considering considerations like taxes or relocation.

Expert Graduates: Our virtual assistants undergo comprehensive training before working with clients, possessing expertise in over 200 specialties. Additionally, they are well-versed in the latest no-code productivity tools.

Thorough Vetting and Training: Wishup's virtual assistants undergo rigorous background checks and verifications, eliminating the need for time-consuming interview processes. They come pre-interviewed and vetted, ready to contribute seamlessly.

No-Questions-Asked Replacement: If your primary assistant faces reliability issues or becomes unavailable due to unforeseen circumstances, Wishup offers immediate replacement without any questions.

Efficient One-Day Onboarding: With pre-interviewed and vetted virtual assistants, the onboarding process becomes a breeze. Say goodbye to tedious procedures, and quickly bring a virtual assistant on board to start contributing to your tasks.

Zero Geographical Limits: Geographical constraints are no longer a hindrance. Depending on your locality and business needs, you can hire a virtual assistant from the US or abroad through Wishup.

7-Day Risk-Free Trial: Curious about the benefits of virtual assistance for your company? Take advantage of Wishup's 7-day free trial with virtual assistants. Assess their alignment with your company's culture and values, and if dissatisfied, request a refund.

Guaranteed Data Security: Before assignment, all Wishup virtual assistants sign a Non-Disclosure Agreement to ensure the utmost confidentiality and security of client data.

Personalized Support: Wishup provides dedicated success managers to support you throughout hiring, offering ongoing query resolution and process management assistance.

Key Takeaways

Entrepreneurs can boost their tax savings and keep earnings by planning ahead. When making important decisions, like choosing a business structure or retirement plan, seeking advice from a knowledgeable tax professional for small businesses is brilliant, even if it involves some cost.

Want to relax and leave tax saving in reliable hands?

Hire a virtual assistant today! Contact our experts to learn how Wishup can help you with tax planning. You can book a free consultation or send us an email at [email protected].

FAQs: Tax Saving Strategies 

How can I save more tax in the USA?

In the USA, several strategies can help you save on taxes:

Maximize Retirement Contributions: Contribute the maximum income allowed to retirement accounts, including 401(k) or IRA, to benefit from tax deductions.

Utilize Health Savings Accounts (HSAs): Contribute to HSAs for medical expenses, as contributions are tax-deductible.

Take Advantage of Tax Credits: Look for available tax credits like the Child or Earned Income Tax Credit.

Itemize Deductions: If eligible, itemize deductions instead of taking the standard deduction to maximize potential tax savings.

Invest Wisely: Opt for tax-efficient investments and consider tax-loss harvesting strategies.

How can high-income earners reduce taxes in Canada?

High-income earners in Canada have various avenues to explore to reduce their tax burden effectively. One key strategy is to maximize contributions to Registered Retirement Savings Plans (RRSPs). Contributions to RRSPs are tax-deductible, allowing high earners to defer taxes on their income while benefiting from tax-sheltered growth within the plan.

Tax-Free Savings Accounts (TFSAs) also serve as a valuable tool for reducing taxes. High-income individuals can contribute to TFSAs, where investment income grows tax-free. This provides withdrawal flexibility, as TFSA withdrawals do not impact taxable income, making it a tax-efficient investment option.