When you run a small business, the accounting and tax management side of the business can be intimidating at best. As you head into the end of the tax year, though, it's important that you think about how you can minimize your tax liability. Sometimes, the best way to do this is by increasing your available deductions. Here are a few tips to discuss with your business tax preparation specialist.
Recruit Your Family
As a sole proprietorship, you have a great resource at your disposal to reduce your business deductions – your family. You can put your family to work at the business and pay them for their time. This will increase your deductions while still keeping the money in the household. This is particularly beneficial if the family members you hire include your spouse, because you can pay your spouse an equivalent salary to yours, which benefits your household income.
Just remember that you cannot pay your family to work at the business if they don't actually do it. They'll have to work in a legitimate position at the company, and you need to pay them an equivalent rate to the current market pay for that position.
Consider Personal Deductions
Sole proprietors and small business owners often use their own personal vehicles and home office space to work, which opens up opportunities for you to reduce your tax liability by increasing your deductions for business use. You can often claim a tax deduction for mileage on your vehicle that's incurred for business purposes, and you can write off a portion of your home maintenance expenses for the office space if it's exclusively used for your business.
To do this, though, you need to track all of your business-related mileage. This gives you the documentation that you need for your tax preparation specialist to claim business deductions for that travel.
In the case of the home office, you'll have to know how much square footage the office contains as compared to the square footage of the entire house. For example, if your office works out to about five percent of the total square footage of the house, you'll be able to write off five percent of your utilities and mortgage cost for the business use of the office.
Since the regulations associated with deductions and tax credits can be very specific, it's often in your best interest to work with an accountant and tax preparer, like Wiggins, Smit, Burby, Reineke, & Company P.A., all year long to ensure that your records are accurate. That way, you have someone to turn to for information when you're looking to reduce your tax liability at the end of the year.
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