High taxes combined with strict business regulations have led many business owners to leave the state. California enforces higher than average state income taxes on business and personal income. California is one of a few states that imposes business and personal taxes on small business owners who set up their businesses as a S corporation or limited liability company (LLC).
The federal government only taxes the business owners at their personal income tax rates. Most states do the same thing, but not California. They tax business owners from both sides.
So how can a business owner reduce their tax burden in Carmel?
Hire A CPA To Help you with Business Tax Preparation
The first thing you should do is hire a CPA who specializes in small business taxes. A Carmel business tax specialist can help you set up an appropriate accounting method for your type of business. The two commonly used accounting methods are cash accounting and accrual accounting. Cash accounting recognizes expenses and revenue when received. Accrual accounting focuses on which expenses generate which revenue.
Maximize Your Tax Deductions
Be sure to keep track of every receipt so you can have a record of all the deductions you wish to claim. Key deductions you can claim are business vehicle expenses, start-up costs, operating expenses, and legal and professional fees. You can also claim capital assets such as equipment, machinery, or buildings. Business travel, loan interest charges, and bad debt can also be included.
Other Expenses You Can Deduct
You can deduct your employees’ wages, money set aside for their retirement plans, and the cost of your business insurance. You can also deduct the rent expenses for your building.
Use Tax Credits That Are Available
The State of California Franchise Tax Board provides a credit chart on its website listing a variety of tax credits that your small business may qualify for. Your business could earn a tax credit for providing an employer child care program, hiring a new full-time employee, creating easy access for disabled employees or even using prison labor.
Donate to Charity
Donating money or items to a non-profit charity organization is an excellent way to reduce your tax burden. The only qualification is that the organization has to be a qualified charity and contributions that are worth $250 or more must be acknowledged in writing from the organization that receives it.
Use an Accountable Plan to Reimburse Employees
If you regularly reimburse employees for travel or other costs, consider using a plan that meets IRS requirements. It’s called an accountable plan. An accountable plan allows a business to deduct their expenses but they don’t report the reimbursements as income to the employees. This plan potentially can save your company employment taxes and can lower your taxable income. Providing your employees an accountable plan for reimbursements can also help your employees save money on their taxes as well as helping your business.
Set Up Benefit Plans for Your Employees
You should consider setting up certain fringe benefits for your employees. Taxes can be avoided if you set up these plans. Tax-exempt benefit plans you can offer your employees include:
- Employer sponsored health insurance
- Educational assistance
- Group term life insurance
- Dependent care assistance
- Disability insurance
- Long-term care insurance
- Transportation benefits’
- Provide meals for employees
More information on the tax benefits of these plans can be found in IRS Publication 15-B (2019), Employer’s Tax Guide To Fringe Benefits.
Hide Your Profits in Retirement Plans
You should provide your employees with a retirement plan. It’s very easy to set up. An employer sponsored 401k or a similar tax deferred plan will allow your employees to make tax deductible contributions to save for their retirement. The employee does not pay taxes on any contributions they make to a 401k or traditional IRA. The retirement savings grow on a tax deferred basis. The distributions are only taxable when the employee takes them in the future, when they’re probably in a lower tax bracket.
There are several retirement plans to choose from. Most small businesses prefer offering their employees a 401k plan. Because it gives the employees the choice and flexibility in planning for their retirement. Whereas, a defined benefit pension plan puts most of the burden on employers.
Also, having a retirement plan is not only good for your employees, it’s good for your business. That’s because employer contributions to a retirement plan tax-deductible and you might qualify for a tax credit just by setting up an employee retirement plan.
Tax Management for Organizations
If you want more information on how you can lower your tax burden contact Savage Accountancy. Savage Accountancy is committed to serving their small business clients. They provide high quality tax and business advisory services.
Tax Accountant Carmel
Clark Savage has practiced in Carmel and the Monterey Peninsula since 1983. He knows and understands the expectations of the community. If you need help lowering your small business tax burden contact them today.