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Reducing taxes

© Bert Markgraf

One nice thing about small business is that you probably end up paying less taxes than when you are employed. Tax laws tend to differ by jurisdiction but, generally, the tax rates for small businesses are lower than the tax rates for large businesses and both are lower than the tax rates for employees. Suddenly that low amount that's left over after expenses is worth a lot more after tax than a corresponding salary.

Before you even start a small business, it is very important to think about the tax implications. If you can manage to start your business and incurr the start-up expenses while you are still drawing income from another source, this can be a big benefit. You can often deduct such losses from salary or other income sources so that, if you've been paying income tax on a substantial salary, you can get it all back by incurring the losses to start up your business during the same year. While you can often get such taxes back for losses in subsequent years, it's much more complicated and, anyway, if you're a typical small business start-up, you need the money now. Looking at this you can see how incurring start-up losses late in the year after earning a salary most of the year would be a good scenario.

Once your business is running, any expenses incurred to earn income can generally be deducted. One exception is that major acquisitions like cars and buildings (and computers) must be listed as assets and only a certain percentage of the total cost can be deducted each year. This is one reason why leasing such assets has become so popular - lease payments can be deducted fully.

Otherwise, a lot of things which you were not able to deduct from income as an employee are now deductible. Don't forget, it is your right to minimize the taxes you have to pay as long as you stay within the rules. This means that you never try to get away with deducting something that is clearly not deductible but also that you deduct items for which the rules are not clear. It isn't your fault that the rules aren't clear and the worst that can happen is that you later have to pay the tax that is due.

For Americans, there is a great page here. Business owners can structure retirement accounts to reduce their taxes. Similar strategies are available in other juridictions - talk to a local accountant.

The copyright of the article Reducing taxes in Small Business is owned by Bert Markgraf. Permission to republish Reducing taxes in print or online must be granted by the author in writing.