Taxes – there’s no avoiding them. But there are ways to reduce the amount you have to pay so that your business is more profitable. All it takes is some preparation, planning, and the advice of a good tax specialist.
So one of the first things you need to do is talk to your accountant about all the legal strategies available for minimizing your tax bill.
Claim everything you can as an expense
This is the best way to reduce the amount of tax you’ll have to pay. But it means being organized and efficient with all your records. You can’t claim something as an expense if you don’t have the necessary documentation. So it’s important that you keep detailed records of everything.
Create a filing system
The first thing you’ll need to do is develop and maintain a meticulous filing system. This is where your accountant comes in – it’s a task you should do with them, or at least following their advice.
Some things to keep in mind are:
- Keep all receipts. It’s a good idea to use an application like Receipt Bank to keep track of all your receipts, meaning you’ll never lose a paper receipt. Write on the back of invoices or small receipts what the receipt was for.
- Create a 1-page document for your staff, outlining what they can and can’t claim for.
- Use accountancy software which uses a bank feed so you can be sure every bank transaction is captured.
Set up a work area at home
Even if your actual business is located somewhere else, it’s a good idea to set up a room in your house as an office and use it for business purposes when you can. As a small business owner, the chances are pretty high that you will end up doing some work from home, so you may as well take advantage of being able to claim a portion of your expenses related to business within your home.
Examples of potential partial deductions include:
- Maintenance costs (like heating, electricity, home insurance and cleaning supplies).
- Mortgage interest.
- Property taxes.
Talk to your accountant about how to go about setting up a home office that meets all the conditions necessary to claim expenses.
File on time
An organized small business owner is one who files their taxes on time. Doing so means you’ll avoid paying penalties or interest, and this is a good saving.
The importance of good accounting software
Keeping good records is a lot easier these days, with many accounting software solutions available. It’s a good idea to talk to your accountant about which one will fit your business best, and which is compatible with their own systems.
And it’s not just to help you minimize your tax bill either. If you ever have to face an audit, poor record keeping will make this process more stressful than it has to be. And while keeping excellent records with a great software solution won’t help you avoid an audit, it could help avoid raising audit-triggering red flags as well as make the audit less painful.
So if your business is new, or you just haven’t got around to acquiring good accounting software, now’s the time to make an appointment with your accountant so you can discuss your options.
What you’re looking to do here is adjust parts of your business so that you can legitimately reduce your net profit, thus paying less tax. Some of the ways you can do this are:
- Review your assets. If you are looking to buy fixed assets, then just before the end of the financial year is better than just after the start, as you can claim depreciation for part of the year just gone. Look around and see what assets can be revalued (you can write off any paper losses) and scrap any assets that may be on the books, but you never use/are obsolete.
- End-of-year sale. Review your inventory and consider having a sale to clear out old stock. Getting some return for inventory is better than having it padding out your closing inventory.
- Review your debts. Are you owed money that you’ve given up chasing? If you’re sure you’ll never see that cash, write it off.
- If you were paid for work that you don’t need to do until the next financial year, inform your accountant. They will then treat this as ‘income in advance’ and add it to next year’s sales. It will temporarily lower your sales (and therefore profit and tax) for the year.
Reducing the amount of tax you have to pay is down to good habits, good records and forward thinking. It literally pays to be as organized as possible, because it means you’re better placed to take advantage of all the legitimate ways you can minimize your tax bill.
All of this planning should be done in conjunction with your accountant. They’ll help you get organized and will assist in keeping your business on track so that you’re paying only what you absolutely have to and are getting the maximum benefits from what tax advantages are available.