Every Penny Counts: How Small Businesses Can Slash Their Tax Bill

Estimated reading time: 7 mins

When you run a small business, every penny counts. That’s why saving money on your tax bill could be the difference between making it into the next year and not.

Taxes are, unfortunately, part and parcel of the business landscape. But businesses don’t have to drown under the weight of them. There are all kinds of ways to get your tax bill down and make it less of a burden for your business. After all, if you can be more efficient with your taxes, that helps you, your employees, and all of the people you might hire in the future.

Here are some of the ways that you can slash your tax bill and enjoy more of the cash that you earn.

Understand The Value Of Capital Allowances

In business, you’re sometimes allowed to make deductions from your taxable income that fall outside the regular expenses bracket. The more that you can deduct, the lower the tax you’ll pay.

Capital allowances rules change all the time and are continually updated — some items you can’t deduct from your income, but others you can. What’s more, the savings can often be substantial.

One of the ways that you can do it is by subtracting the depreciation of your buildings from your total income for the year. Buildings depreciate over time, and at some point, you’ll have to pay to maintain them, so it makes sense to deduct a nominal amount. How much this is depends on the value of the building, so it makes sense. What you don’t want is your hard-earned income going into maintenance payments for your property and not into your back pocket.

Use Tax Software

While you may still need an accountant to verify all of the figures and check you’re not missing any tricks, tax software can help you save a lot of money.

The first way it helps is by saving on accounting costs. Hiring an accountant is expensive, especially if your business accounts are lengthy and complicated. It’s much easier for you to fill out tax software as you go and then letting the software make the tax calculation at the end of the year. If you stay on top of it, you can find that you make substantial savings over the long-term.

The second way it helps is by finding ways in which you could save additional money on your tax bill. Software creators are keen to give their business customers value, and one of the ways that they do this is by finding savings. Many brands of software come with pre-built ideas for how your company could get its tax bill down and pay less into the government coffers.

Track All Your Spending

When it comes to saving on taxes, the most fruitful route is to track spending and expenses. In the past, tracking expenses were somewhat of a challenge, but in the modern world, it’s easy. Many of the software packages we’ve been discussing, for instance, come with the ability to scan receipts from photos and enter all of the information into your accounts. The same goes for invoices. You just take a picture of them with the camera on your phone, and the software will do the rest. Quicken, Quickbooks and Freshbooks are all good options here.

Many business owners have a habit of collecting all their receipts in a shoebox and then counting them all up at the end of the financial year. It’s a big ordeal and not something any of them look forward to.

Tracking your expenses is all about being diligent and entering them into your software as they’re incurred. What you don’t want is to find yourself with a mountain of receipts at the end of the financial year that requires processing. Usually, it’s you who has to do it.

Pay into Your Retirement Accounts

Business owners, just like everyone else, have the opportunity to pay into their retirement accounts. The current caps on the amount that you can pay tax-deferred into these accounts change from year to year, but the principle is the same. All you do is pay yourself into these accounts first, and you can automatically deduct the income from your taxable amount.

Retirement accounts might not be particularly sexy, but they’re a great way to make the most of your income, especially if you’re on the threshold of a higher tax bracket. All you do is deduct the dollar amount that you put into your IRA, and then wait until you come to retirement age before you release it. This way, you can get your tax bill down substantially in the present while taking control of it in the future too.

Deduct Your Home Office

Home offices aren’t free. Plus, if you’re a freelancer, they’re absolutely vital for enabling you to make money. Without them, you have no means of doing what you do.

Deducting your home office, however, can appear a little trick at first blush, so its certainly worth a little extra attention.

Home offices have two components: the home office itself, and the stuff in it. Merely operating a home office can enable you to get a tax deduction automatically. Plus, anything you put in it that you need for work may also fall under the tax deduction rules.

Keep Close Track Of Your Vehicle Expenses

Just like home offices, freelancers and small business owners need vehicles to conduct their operations. For instance, you might use yours to make deliveries or visit clients. It makes sense, therefore, for cars to be an expense.

The problem for most companies, though, is that they’re not tracking their vehicle mileage closely enough – and this eats into profits.

The current rules allow companies to claim back the expense of putting fuel in their vehicles and depreciation on the cars themselves. These, after all, are costs that the company must eventually absorb. The rules, however, state that you must track all vehicle miles if you want to make a claim, as well as keep all your gas receipts.

Doing that, of course, is a big problem. You have to monitor your mileage continually and then use the expenses calculator to work out how much you can claim off your tax bill.

It’s a massive challenge and something that is difficult to do. However, you can now get apps on your smartphone that will track vehicle miles for you. You just switch on the app, tell it that you’re traveling for business, and that’s it: all the calculations happen in the background.

For some drivers, the savings can be substantial. A Prius driver, for instance, who travels more than 10,000 miles per year, could save in the order of $4,000 per year by making the right claims and the right time.

Hire Within The Family

The tax rules, as they stand, make it cheaper to hire in the family than hire from elsewhere. The reason? Hiring people under the age of 18 attracts a different tax rate from hiring adults from the main job market.

Nobody is advocating child labor here. But if you want to give the younger members of your family a chance to understand the value of money, then hiring in the family can be a great idea to save on taxes.

Children typically have a lower tax bracket. For this reason, you can lower the tax burden on the whole family. Instead of paying your kids an allowance out of highly taxed income, it makes much more sense for you to pay them directly and get them to work for the privilege. Remember, kids count as a totally separate tax entity from you, so you can pay them independently, and they pay tax individually too.

Try To Defer Taxes

Sometimes it doesn’t make sense to pay all taxes upfront in the year that you generate the income. Often, it’s better from a financial perspective to put taxes off into the future.

For instance, if you know that you want to go on an expensive holiday, you might not want this year’s high taxes eating into your budget. One of the things that you can do is defer taxes, paying them in future years instead of the present.

Most businesses choose to defer taxes after a large capital outlay. Instead of using deducting depreciation from their income statement in future years, they take off the full deduction in the present. By doing this, it minimizes the current tax burden in the present year and increases it in the following.

In summary, tax rules allow companies to make savings, but they need to be smart about it. Using an accountant was, traditionally, the best method, but with modern software, the dynamic is changing. You can often save a considerable amount on your taxes while at the same time cutting the time that you spend on filing them.

Don’t forget; there are often opportunities to save on your total tax bill when filing your expenses, especially for vehicles, so don’t miss out.

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