Tax season is often a dreaded time, especially if you aren’t the type to keep up with your business finances throughout the year. If you also don’t fully understand tax deductions and tax loopholes that small businesses are eligible then well, you’ve got lots to learn.
Thankfully, we’ve got you! Made up of solopreneurs, entrepreneurs, or a small team, truly small businesses are just like small, medium, or large-sized businesses. As a business owner, you should still make the effort to fully understand the tax loopholes available. Don’t worry, it’s all legal—you just might not know about them.
Whether you choose to file early or last minute, the choice is entirely up to you. After all, it’s all about knowing what you know, and not knowing what you don’t know.
Curious to see where you might be missing out? Pay less tax by taking advantage of these tax loopholes this year:
Loophole #1: Save major purchases for year-end
As a truly small business owner, you’re busy building your empire. You take part in strategy, sales, marketing, operations, and finances, so the last thing on your mind is investigating tax-related deductions. But knowing these tax loopholes is key, and saving major purchases, like a new home office set-up (for remote working) or a new laptop, for year-end is a loophole that often gets overlooked. While these purchases depreciate in value, you can reduce your tax burden by making these major purchases at year-end. By doing so, you can claim a full year’s worth of depreciation sooner, even though you’ve really only had these items for a few weeks or even a few days.
Loophole #2: Defer income to reduce tax this year
Did you know that you can defer income in two ways?
- At the beginning of the year between January and February, or
- At the end of the previous year in November or December
By deferring income, you can reduce your overall business income for the tax year which in turn, reduces the overall taxes you have to pay as well.
Who wouldn’t want that to take advantage of tax loopholes like that?
Keep in mind that this loophole depends on several factors like projected income or losses and future tax rates. By reducing the current taxes you pay this fiscal year, you’re essentially deferring a portion of the income that you receive between December 2020 and January 2021, for example.
Loophole #3: Investigate your home office deductions
Like the last point, there’s a comprehensive list of home office deductions that you might not be aware of. Especially now that remote working will be the new normal, make sure you don’t miss out on home office-related tax loopholes.
The ones that you can’t miss out on are:
- Home-based business insurance
- Office expenses (you must distinguish between office expenses vs. personal)
- Mortgage interest and property taxes (if you carry a mortgage and run a home-based business)
- Other business-use home expenses (like electricity, heat, telephone, internet connection and maintenance and repairs)
And if you’re a Canadian resident and you’ve been working from home more than 50 percent of the time or at least four consecutive weeks in 2020, you might also be eligible for a new tax deduction that extends to everyone in Canada to claim a home office deduction!
Loophole #4: Save on tax through charitable giving
Did you know that you can reduce your taxes on your donations?
As a small business owner, you can deduct charitable donations that you make to qualifying organizations. If your business is set up as a sole proprietorship, LLC or partnership, you can claim these expenses on your personal tax forms. If your company is a corporation, you claim charitable donations on your corporate tax return.
As Thomas Jefferson said, knowledge is power.
And he couldn’t be more right, especially when it comes to knowing the tax loopholes that are available to you. After all, if other businesses are capitalizing on it, why shouldn’t you?