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How to Save on Taxes For New Businesses in the USA

How to save on taxes in the USA

Starting a business is an exciting journey filled with challenges and opportunities. One of the smartest moves you can make as an entrepreneur is understanding how to save on taxes. What does it mean to save on taxes?

Saving on taxes is not just about cutting costs—it’s about making strategic decisions that align with your business goals and the local tax regulations. This savvy approach can significantly impact your startup’s financial health and long-term growth.

At ReDahlia, we don’t just help you Start, Setup And Scale your business, we also help you comply with your taxes through our startup- Complify. Talk to us on WhatsApp- 08038874148 about your taxes.

Start Your Business in 30 Days Even If You Don't Have An Idea
Start Your Business in 30 Days Even If You Don’t Have An Idea

Why is tax efficiency so critical for your business? When you’re just kicking off, every penny counts. Optimizing your tax situation can free up cash that can be reinvested into your business, and help you scale faster and more sustainably.

See Also: How to move from idea to starting your business in 30 days.

Moreover, being tax-savvy helps you avoid pitfalls that could lead to hefty fines or legal issues, ensuring that your business stays on the right side of the law.

In this guide, you will learn the legal ways to save on taxes. We’ll explore the importance of choosing the right business structure, understanding your tax obligations, and implementing strategies to keep more of your hard-earned money.

We’ll also touch on planning for the future and when it’s time to seek professional advice. By the end of this article, you’ll be equipped with practical tips on how to save on taxes. This will pave the way for a financially sound business venture.

How To Lay the Groundwork for Your Business So You Can Save More On Taxes

When starting your business, one of the first and most crucial steps is choosing the right business structure. The type of business entity you select will not only dictate your day-to-day operations but also have significant implications for how much tax you’ll pay.

Choosing the Right Business Structure

The decision between a Sole Proprietorship, Partnership, Limited Liability Company (LLC), and Corporation can be daunting, but it’s essential to understand each to determine the best fit for your business needs and tax-saving goals. We have shared the factors to consider before you choose a legal structure here.

We will go over the different legal structures briefly:

Sole Proprietorship

This is the simplest form, where the business is owned and run by one individual. There’s no distinction between the owner and the business for tax purposes, which means you report your business income and expenses on your personal tax return. It’s straightforward but offers no personal liability protection.

Partnership

In a partnership, two or more people share ownership. A partnership doesn’t pay tax on its income but “passes through” any profits or losses to the individual partners. Partners then include their share of the partnership’s income or loss on their personal tax returns.

Limited Liability Company (LLC)

An LLC offers the best of both worlds, combining the ease of a partnership with the limited liability protection of a corporation. LLCs also enjoy the benefit of pass-through taxation unless they opt to be taxed as a corporation.

Corporation

Go from idea to starting your business in 30 days
Go from idea to starting your business in 30 days

Typically, a corporation is more complex and recommended for larger businesses. It’s a separate legal entity from its owners, providing the most personal liability protection but also requiring more extensive record-keeping, operational processes, and reporting.

Corporations are subject to corporate tax rates, and any dividends paid to shareholders are taxed again at the individual level, which can lead to double taxation.

See Also: How to start a business around your passion.

Tax Implications of Each Legal Structure

Each business structure comes with different tax obligations. A Sole Proprietorship and Partnership offer simplicity in taxation but less in the way of tax planning strategies.

An LLC provides more flexibility, as it can choose to be taxed as a Sole Proprietorship, Partnership, or Corporation, opening up opportunities for tax savings.

Meanwhile, a Corporation faces double taxation but can benefit from corporate tax advantages, such as lower corporate tax rates and business deductions.

How the Right Structure Can Help You Save on Taxes

Selecting the right business structure can help you significantly save on taxes. For example, an LLC can help you avoid double taxation while still enjoying liability protection. Corporations can take advantage of business expense deductions, tax credits, and lower corporate tax rates.

Registering Your Business

Proper registration and documentation are not just legal formalities—they can influence your tax liabilities. Depending on your location and business structure, different tax requirements will apply. Reach us for all your business registration needs on WharsApp- 08038874148.

Registering your business legitimizes your operation and can establish a clear separation between personal and business finances, which is crucial for tax purposes.

Keeping accurate and comprehensive records supports your tax filings and can substantiate your claims for deductions and credits.

The process of registering your business may determine your tax ID requirements, eligibility for tax benefits, and the specific tax forms you need to file. It’s important to get this step right to ensure you’re not missing out on tax-saving opportunities or running afoul of tax laws.

See Also: How beginners can start a business successfully.

Understanding Your Tax Obligations

Navigating the waters of business taxation can seem daunting, but a clear understanding of your tax obligations is essential for running a successful business.

Taxes are not just a duty; they’re also a significant factor in your financial planning. Let’s break down the basics to ensure you stay compliant and make smart tax-related decisions for your business. ReDahlia through our sister company will help you stay compliant with your taxes. Reach us at WhatsApp- 08038874148.

Basics of Business Taxation

Every business, regardless of size, has to deal with taxes. Here’s what you need to know:

Income Tax:

This is levied on the profits of a business. As an entrepreneur, if your business is a Sole Proprietorship or Partnership, you’ll pay this through your personal tax return. For LLCs and Corporations, the situation varies based on your chosen tax status.

Value Added Tax (VAT):

VAT is a consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale. If your business sells goods or services, understanding VAT is crucial.

Payroll Taxes

If your business has employees, you’re responsible for withholding the correct amount of income tax and national insurance from their wages and paying these to the government.

Corporate Tax:

Applicable to Corporations, this is a tax on the profits of incorporated entities. It is reported and paid separately from your personal taxes.

Capital Gains Tax:

If your business sells property or shares, you may be subject to capital gains tax on the profit made from the sale.

Taxation Periods and Deadlines

Taxation periods can vary, but generally, they align with the fiscal or calendar year. Deadlines for tax payments and filings are set by the tax authorities and missing them can result in penalties. Mark these dates on your calendar:

Annual Returns:

Typically due once a year, providing a summary of your business income, expenses, and net profit.

Quarterly Payments

Some taxes, like estimated tax payments for income tax or VAT, might need to be paid quarterly.

Monthly Obligations:

Payroll taxes often need to be filed and paid monthly.

Why You Should Be Compliant with Your Taxes

Staying on top of your tax obligations means less trouble down the line. Here’s why compliance is non-negotiable:

Avoiding Penalties:

Late filings or payments can lead to fines and interest charges, which are an unnecessary expense that can be easily avoided with proper planning.

Audit Readiness:

If the tax authorities decide to audit your business, being compliant will make the process much smoother and quicker.

Record-keeping and Reporting Requirements For Your Taxes

Good record-keeping is the backbone of tax compliance. Here’s what you should focus on:

Documentation:

Keep all receipts, invoices, payroll records, and tax filings. These documents support the entries in your books and on your tax returns.

Accounting Systems:

Whether you use software or manual books, choose a system that works for your business and maintain it diligently.

Reporting:

Know which tax forms are relevant to your business and when to file them. This could range from employment tax returns to annual income tax filings.

See Also: Comprehensive guide to business funding in Nigeria.

Tax Savings Strategies

Mastering tax savings strategies is a critical skill for any entrepreneur. By smartly leveraging business expenses and taking advantage of tax credits and incentives, you can significantly reduce your tax burden.

Let’s explore how you can put these strategies to work for your business.

How to Leverage Business Expenses To Save On Taxes

Almost every entrepreneur incurs various expenses. The key is knowing which of these can legitimately reduce your taxable income.

What Qualifies as a Deductible Business Expense:

Generally, for an expense to be deductible, it must be both ordinary and necessary for your trade or business operations. This includes rent for office space, salaries and wages paid to employees, marketing and advertising costs, and utilities. Even home office expenses can be deductible under certain conditions if you work from home.

How to Track and Claim Expenses So You Can Save on Taxes:

Meticulous record-keeping is the foundation of leveraging your business expenses. Implement a reliable system to record all expenses throughout the year, keeping receipts, invoices, and related documents.

Software tools can automate much of this process, syncing with your bank accounts and categorizing expenses. When tax time comes, you’ll be prepared to claim these deductions, reducing your taxable income.

How to Take Advantage of Tax Credits and Incentives

Tax credits are a powerful way to save money, as they provide a dollar-for-dollar reduction of your tax liability, not just a reduction of taxable income like deductions.

Types of Available Tax Credits:

There are many tax credits available for businesses, ranging from those for hiring certain employees to investing in research and development.

For example, the Work Opportunity Tax Credit (WOTC) is available for hiring individuals from certain target groups who have consistently faced significant barriers to employment.

Eligibility for Incentives and How to Claim Them:

Eligibility for these incentives can be complex and may require meeting specific criteria or certifications. Take time to research which tax credits and incentives apply to your business.

You may need to complete additional forms or provide detailed information to claim these credits. In some cases, it’s advisable to consult with a tax professional to ensure you’re not leaving money on the table.

See Also: How scale your business.

Understanding Your Tax and Planning for the Future

A wise entrepreneur not only focuses on the present but also prepares for the future. This includes setting up retirement plans and understanding the role of reinvestment in shaping your business’s fiscal future. How do you plan for the future?

Setting Up a Retirement Plan

Retirement planning is something many entrepreneurs overlook. Yet, setting up a retirement plan can provide significant tax benefits while securing your financial future.

How Retirement Plans Can Provide Tax Benefits:

Contributions to retirement plans are often tax-deductible, meaning the money you put into a qualified plan can reduce your taxable income for the year.

Furthermore, the investment growth in these plans is typically tax-deferred until you take distributions in retirement.

Comparing Different Types of Plans for Entrepreneurs:

There are several retirement plans suitable for entrepreneurs. A Solo 401(k) is designed for business owners with no employees, allowing high contribution limits.

A Simplified Employee Pension (SEP) IRA allows for contributions of up to 25% of each employee’s pay. The Savings Incentive Match Plan for Employees (SIMPLE) IRA is good for smaller businesses, offering simpler and less costly plan management. Each plan has its nuances, and the right choice depends on your business size, growth trajectory, and personal financial goals.

Reinvesting in Your Business

Reinvesting profits back into your business is not only a growth strategy but also a tax strategy.

How Reinvestment Can Impact Your Tax Situation:

By reinvesting profits, you’re essentially deferring tax payments on that income until a later date. This can be especially advantageous if you expect to be in a lower tax bracket in the future.

Furthermore, if you reinvest in qualifying business property or improvements, you may be able to take advantage of tax deductions or credits.

Strategic Reinvestment Tips:

Always have a plan for reinvestment. Whether it’s upgrading equipment, expanding operations, or investing in research and development, ensure that every dollar reinvested aligns with your long-term business strategy.

Also, consider how reinvestments might qualify for tax deductions, such as Section 179 or bonus depreciation for property purchases.

Seeking Professional Advice For Your Tax

Understanding tax laws and regulations can be very confusing. Sometimes, it’s not just helpful but really important to get advice from professionals.

When to Consult a Tax Professional

Understanding the Complexity:

If you’re grappling with complex tax issues or transactions, such as international sales, it’s time to consult a tax professional.

During Major Business Changes:

Events like business expansion, downsizing, or restructuring all have significant tax implications. A tax professional can guide you through these transitions.

Facing Tax Problems:

If you’re dealing with audits or back taxes, professional help can protect your interests.

Scenarios Where Professional Advice From a Tax Expert Is Invaluable

Tax Planning

Proactive tax planning can save you more than reactive tax preparation. A tax advisor can help structure your business transactions to minimize tax liabilities.

Investment Decisions

The implications of significant investments and purchases can be nuanced. Tax professionals can provide clarity on how these decisions will affect your tax situation.

Industry-Specific Advice

Different industries have unique tax treatments and deductions. Expert advice can ensure you’re not missing out on sector-specific benefits.

How to Find a Reputable Tax Advisor

Check Credentials:

Look for professionals with recognized qualifications like Certified Public Accountant (CPA) or Enrolled Agent (EA) designations.

Seek Referrals:

Recommendations from other business owners or industry associates can be invaluable.

Verify Experience

Ensure they have experience with businesses similar to yours in size and industry.

Ongoing Education About Taxes

Staying Informed on Tax Law Changes:

Tax laws are ever-evolving, with new legislation, regulations, and rulings coming into effect regularly. Staying updated is crucial.

Subscribe to Updates:

Sign up for newsletters from reputable tax-related resources.

Attend Seminars and Workshops:

These can be valuable for deepening your understanding and networking with professionals.

Resources for Continuous Learning

IRS Publications:

The IRS offers a wealth of guides and publications that are updated with the latest tax information.

Professional Associations

Organizations like the American Institute of CPAs provide resources and learning opportunities.

Online Courses

Many universities and professional bodies offer courses in taxation that cater to entrepreneurs.

Conclusion:

We have shared extensively, strategies that will help you save on taxes. It’s clear that having a good tax plan is a big help for your business. Planning your taxes well is key to making the most of your money and helping your business grow steadily. If you’re smart about how you handle your taxes, keep good records, and put money back into your business wisely, you can save more.

Finding the right balance between saving on taxes and growing your business is tricky. It needs careful planning and the ability to change with new business trends. The main aim isn’t just to cut down on taxes but to use tax plans to support your main business goals.

Now’s the time to get a grip on your business’s money matters. Use the tips we’ve talked about to think about how your choices affect your taxes.

If you need help, remember that ReDahlia is here for you. We provide personalized advice to help you with tax planning so your business can do well against others.

Start now — look over your tax plans, ask for expert advice when you need it, and never stop learning. You and your business will be grateful later for the effort and planning you do now.

How We Can Work with You to Start And Grow Your Business

If you want to work with our founder- Florence Chikezie to start a profitable and sustainable business, then enrol in the Start Your Business in 30 Days Program. She will take you from idea to starting your business in 30 days. At the end of the program, you will get a registered business with CAC, logo and brand assets, admin set-up, one-on-one consulting sessions and more. Click here to enrol.

Every week, she teaches practical business lessons that have helped thousands of entrepreneurs start and grow their businesses. If you want to benefit from her teachings, click to sign up for the weekly business lesson here.

She is an internationally trained award-winning entrepreneur running three profitable businesses and a member of the prestigious Forbes Coaches Council. 

She also works with companies and established corporations to scale their impact and revenue. Reach us at Business@entrepreneurs.ng if you would like to transform your business.

See the different ways we can help increase your business success.

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