How to Reduce Your Tax Liability?
Every business’s core operational objective is to maximize lucrative assets and minimize liabilities. This not only adds to their profitability but also helps them improve their liquidity position.
Here are a few ways you can do so:
Contribute to tax-sheltered retirement savings
The income tax that you pay every year is applied to your gross income. The most convenient way to reduce this figure is to contribute to your employer-sponsored retirement plan.
Maxing out your 401(K) is one of the easiest ways to save some money for your retirement and, eventually, the tax bill. Most employers do offer plans that allow you to defer a specific portion of your monthly paycheck. This amount eventually goes to your tax-deferred retirement account. If you’re self-employed or have income from wages, you can also invest in either a traditional or Roth IRA. The traditional IRA is for the pre-tax contributions, whereas the Roth IRA is for the after-tax contributions. To max out on your post-retirement tax savings, you can also contribute to a spousal IRA.
Donate to charities
Did you know donating to a qualified and credible charitable organization helps reduce your taxes? You can make these contributions in any form—cash, goods, and household items. When you start itemizing the deductions on your tax returns, donations can reduce your tax liability.
Capitalize on investment losses
If your business has any investments that have declined in value than the historical cost, you might want to sell them for now. This will help you save up on the tax liability for the year. This strategy is known as tax-loss harvesting. You can write off these losses against the investment gains—up to a certain limit. Beyond this limit, any remaining amount can be carried forward to future years. This strategy is also beneficial because you can delay selling off an appreciated asset, so you don’t get taxed on the gain. We recommend doing so, especially in the year when your taxable income is high.
As a small business that is still in the startup phase, you could do with some expert financial advice. We recommend reaching out to the accountancy experts at Faber LLP. They’re an accounting firm that also offers credible business and management consulting services to help businesses in Edmonton boost their profitability. Other than the tax liability, their team can also assist you with corporate financing, financial projections, cash flow management, and budget preparation. Get in touch.