As a small business entrepreneur, you are liable to pay taxes on your revenues. Income tax is one of most of the most challenging things to understand. As an entrepreneur, you would intent to retain more and more money for your business growth, which is possible only if you reduce your taxes.
You will have to contact your accountant to understand the ways to reduce your taxes. There are various expenses that can get deducted from your income while others cannot, but a few tactics allow you to use your costs brilliantly to get a tax benefit.
- Hire your own family member
Hiring a family member can help you a lot to reduce your taxes. You will pay them the same salary you pay any other employee. You will show it as your expense, but on the other hand, the money will be coming into your pocket. This means you will get tax benefits without incurring any costs. However, the salary your family member receives will be taxable.
You can even employ your child, and you will get bigger benefits in taxes because their earned income will be transferred to an IRA. Because there are many decades to retirement, there will be a sizeable amount of money due to a compounding effect.
- Fund the right retirement plan
There are several retirement options, but you should choose the right one for your own and your employees to get tax benefits. Contributions to 401(K) plans are tax deductible. These plans are more cost-effective for employers than pension plans because they are not subject to a fixed payout. Further, you do not need to match your employees’ contributions.
Another retirement scheme is a simplified employee pension plan. It is a better option for tax savings for small business entrepreneurs. You are supposed to contribute a limited amount of money. You will get the tax relief on the contribution you make. There are certain deduction rules that depend on the contribution you make to your employees’ pension.
- Save money for medical bills
Medical expenses are on the rise. You should have enough funds to be able to meet them. you might be healthy now and therefore may think that you do not need the one, but life is full of unexpected turns of events. You should open a health savings account provided you have got a health plan that is tax deductible.
As a self-employed, you are allowed to deduct the cost of your health insurance. You can also get deduction on the health insurance of your spouse and children who are less than 27-years-old. You can make withdrawals and they are all tax-free as long as the money spent on qualified medical expenses.
- Business travelling
Business travelling is very common. If you have several branches across the country or you are to travel to meet clients, you can get travelling expenses deducted from your taxable income. Make sure you have all the tickets for the flight or fuel that you spent on your business trip.
You can also include accommodation expenses related to your business. Remember that you must have tickets and bills to prove the money you spent on your business trip. You are not allowed to receive tax benefits on your personal travelling.
- Invest more in marketing
Without investing in marketing, you will not be able to retain new customers. You should use digital marketing methods rather than traditional marketing. You will reach out to as many customers as possible without spending a lot of money. Marketing expenses are tax deductible. However, you must have proof to show that you spent money on the marketing of your business.
If you take out business loans in the UK to meet marketing expenses, the interest you pay on your business loan will also be considered your expense, and hence, you can get it deducted from your taxable income. At the time of taking out a loan, make sure you do not fall behind on payments.
You will unnecessarily end up paying a lot more money as interest. If you want to increase the marketing budget despite the fact that you are dependent on a business loan, you should carefully ensure your repaying capacity. Talk to your business finance broker to help you get the best small business loan based on your overall financial condition.
- Business utilities
Business utility expenses can also be deducted from tax. For instance, you can get expenses like phone bills, vehicle expenses, and parking charges deducted from your taxable income. However, you need to bear in mind that no vehicle expenses will be deducted if that is used for your personal expenses. It will be much easier if you have a vehicle exclusively used for your business.
Some self-employed people operate from home, and it can be difficult to separate business and personal expenses. Despite that, you can get a proportion of your expenses deducted from your taxable income. Talk to your accountant to get help on this. Depreciation is another expense you can deduct from your taxable income.
- Donation
Donation is very common for small business entrepreneurs. Not only do you contribute money to the welfare of your society, but you also get that money deducted from your taxable income. You can donate money in cash, too. As long as you have a receipt of it, you are eligible to get it deducted from taxable income.
Donating money gives you not only the satisfaction of doing a good deed but also tax benefits. In order to save taxes by making donations, you need to donate to registered charities and funds such as PM’s relief fund. You can also donate to a recognised political party to claim tax breaks.
- Digital transactions
You should lay emphasis on digital transactions if you are serious about getting tax benefits. It is not a wise act to pay your employees or meet other expenses in cash. Moreover, the income tax department frowns upon cash transactions.
Unnecessary doubts will be raised, and you will be in a jam. Make sure you pay your employees through bank transfer. As long as it is about other expenses, you should make them through online modes. It can be hard to prove anything if you make payments in cash.
The bottom line
You can get a lot of expenses deducted from your tax bill, but make sure that those expenses are related to your business. You must have receipts for all those expenses.
