As a business owner/Entrepreneur you know that the only two things guaranteed in life are death and taxes. Paying taxes on time is both your duty and obligation, however, I tell clients it doesn’t make you more patriotic for paying extra dollars to Uncle Sam. Taxes are unavoidable. It’s not like you can run away from paying taxes forever, sooner or later the tax department will find you, and then you’ll have to pay for your mistakes. In this article, you will learn 7 ways business owners can mitigate tax liability.

But even if you pay our taxes on time, you can still pay a lot more tax than you should! As a business owner, it could be really hard to save money on taxes legally. Tax laws are huge and it’s almost impossible to know all the tax deductions without any previous knowledge. So to help you, we have compiled a list of important tax-saving tips that every business owner should know.

It is important you talk to your CPA and financial advisor before you take any of the following recommendations.

Here are a few strategies we can recommend asking questions about:

1. Know the basics

In order to save money on taxes, it’s recommended for all entrepreneurs/business owners to do their homework before filing the returns. It is advised to go through the previous year’s tax returns and see if there were any mistakes or discrepancies. It is also good to know your financial situation and where you stand currently. You need to know how much you can afford to pay as taxes and how much money you could save on taxes. It’s good to use a tax calculator so that we can easily calculate our estimated taxes for the year.

2. Hire a family member as an employee

This is one of the most popular techniques used by many entrepreneurs in order to save money on taxes. You can hire your spouse, children, or even a relative as an employee for your company. Not only could it help you mitigate tax liability but could also add value to the business.

3. Invest in retirement plans like SEP-IRA and 401(K)

Planning for your retirement is one of the best ways to save money on taxes. If you are a business owner, you can always contribute to your SEP IRA account or 401(K) which is a great way to save for your retirement.

SEP IRA: Simplified Employee Pension Individual Retirement Arrangement or SEP IRA is an Individual Retirement Account (IRA) used by business owners to offer their employees and themselves tax deducted savings for their retirement. You can save up to 25% of their net earnings or up to $61,000 of your annual income under a SEP IRA in 2022.

401(k)s and IRAs get early withdrawal penalties. If you withdraw money from your SEP IRA before the age of 59 and a half you will be subjected to ordinary income taxes and a 10% early withdrawal penalty. There are special circumstances such as the purchase of your first property or disability needs that may bypass the early withdrawal penalty. Make sure you talk to your financial advisor or CPA before attempting to withdraw money from retirement accounts.

401(K): The 401(K) is an employer-sponsored retirement plan that allows you to save for your retirement with pre-tax money. This way, not only are you able to save money on taxes but the interest earned on this account is also tax-free. You can contribute up to $19,500 in a 401(K) account and this amount increases as you get older. You will only get taxed when you withdraw money from your 401(K) account.

For more information on 401(k)s and to see some strategies on how to master your 401(K) plan see our eBook “Mastering the 401(k)”

4. Invest in medical insurance and medical expenses

It is advised to contribute as much as possible towards your medical insurance and medical expenses. You can contribute up to 100% of your premiums under self-employed health insurance which will help cut down on out-of-pocket healthcare costs such as prescriptions, co-payments, and deductibles. Another great tool is the health savings account (HSA). Your HSA contributions will be 100% tax-deductible and can be used to pay for qualified medical expenses not covered by high-deductible health insurance. 2022 limits are  $3,650 for an individual and $7,300 for family coverage. Make sure to consult with your financial advisor and CPA before withdrawing from your account as it can incur taxes and penalties if you don’t use the money for its intended purpose.

With the pandemic in play check out our investment playbook

5. Donate to charities

Donating to charities is one of the oldest tricks in the books of saving money on taxes. You can contribute up to 50% of your adjusted gross income as donations and this amount is tax-deductible. So, not only will you be able to save money on taxes but also help those in need. The government allows you to carry forward your donations and use them the next year.

6. Keep your all expense reports and receipts on check

A lot of entrepreneurs neglect to keep the expense reports and receipts. Make sure that you are using all the tax deductions available to you so that you can cut down on overall expenses. Keep track of receipts for all your business meetings, conferences, travel expenses, home office expenses, etc. and discuss the best course of action with your tax professional

7. Keep track of your mileage

If your business requires you to drive in order to conduct business you could deduct all the miles you have driven in your car for business purposes. You need to keep a record of the miles driven every year so that you can claim it when filing taxes. Make sure to keep a mileage log for business purposes or download an app that does that for you automatically. Make sure your accountant has the mileage log to determine whether the mileage you drove could count as a deduction for you.

Final thoughts:

As you can see from the above-mentioned article, there are several ways business owners can reduce their tax liability. You need to have clear information on what tax breaks and deductions are available to you so that you can plan your finances accordingly. “That is why it’s imperative you speak with your tax professional before implementing any tax strategies.”

Tidemark Financial Partners and LPL Financial do not provide legal advice or tax services. Please consult your legal advisor or tax advisor regarding your specific situation.