Legal Ways Businesses Can Reduce Their Tax Burden

Income-tax levers

Deductions

Ordinary and necessary business expenses are generally deductible. Keeping clean records and timing purchases thoughtfully (including depreciation elections on equipment) is basic but valuable.

Tax credits

Credits reduce tax dollar-for-dollar. Commonly reviewed federal credits include the Work Opportunity Tax Credit for hiring from certain targeted groups, the credit for increasing research activities, the small employer pension plan startup credit and the small business health care tax credit. Each has specific eligibility and filing requirements.

Retirement plans

Employer contributions to qualified retirement plans are generally deductible, and small employers may qualify for startup credits.

Payroll-tax levers

Payroll tax is often overlooked in tax planning because it is paid automatically. It is also one of the few taxes that applies from the first dollar of wages. Levers include:

• A Section 125 cafeteria plan so eligible benefit elections are excluded from FICA and FUTA wages.
• Accountable-plan reimbursements for legitimate business expenses instead of taxable allowances.
• Correct worker classification and timely deposits, which avoid penalties.

See understanding employer payroll taxes for how each tax is calculated.

Red flags to avoid

• Any arrangement promoted with “guaranteed” savings or no downside.
• Structures without a written plan document or professional review.
• Strategies that depend on misclassifying workers or reporting less than actual wages.

The IRS publishes warnings about abusive schemes each year. A legitimate strategy should be explainable in plain language and supported by documentation.

Questions to bring to your CPA

• Which federal and state credits might we qualify for that we are not claiming?
• Is our benefits structure using available pre-tax treatment?
• Are our expense reimbursements handled through an accountable plan?
• Does our entity structure still fit our size and owners?