3 Ways to Save on Taxes This Year!

When it comes to saving taxes, being proactive is definitely the way to go. Now that the hectic holiday season is over, don’t forget to take a new look at ways to save money. Here are three suggestions to help you out:

1. Where are you spending money?

Where do you spend money each month? Something I recommend to everyone is to take a look at their monthly expenses every so often and see what can be moved from the personal side to the business side.

Remember, to make an expense a legitimate write-off you need to ask yourself if that expense passes the “reasonable and necessary for the production of income” test.

Take cell phones, for example. Do you use a cell phone to connect with your clients or customers? Then the costs to operate that cell phone are a legitimate business deduction.

As soon as I say that, someone almost always asks me about using a cell phone for both business and personal calls, and whether the costs should be allocated accordingly. And while you could do this, I’m not always sure it’s necessary.

Most modern cell phone plans consist of a set number of minutes that you pay for regardless of whether you use them or not. As long as you’re not incurring overage charges for personal calls, I wouldn’t be too concerned.

For the IRS to determine whether your phone was being used more for pleasure than business, they would have to examine your cell phone records, call by call.

2. Make estimated tax payments a thing of the past

I don’t know about you, but as a business owner drawing a salary, I hate the idea that I may also be required to make extra tax payments. To me, that’s one of the benefits to operating through a business structure.

If you’re operating as a Sole Proprietor (i.e., a Schedule C business), then you know all about estimated tax payments. Based on the previous year’s tax return, the IRS decides how much tax you should pay the following year, and four times a year you get to write out a pretty large check.

Many of you who run your businesses through S Corporations (or LLCs taxed as S Corps) know all about estimated tax payments, too. In your case, the IRS makes you pay estimated tax on your profit distributions, particularly if your S Corporation is fairly profitable and you’re taking out healthy profit draws.

What really bugs me, though, is that estimated tax payments often can’t be calculated until after you’ve filed your previous year’s tax return.

Avoid paying late-payment penalties

So if you file for an extension (which is something I think everyone should do), you won’t begin making estimated tax payments until well into the next year–meaning that once the IRS processes your return and calculates your estimated tax payments, they’ll also add in penalties for late payment!

Well, here’s a way to avoid all of that. You can avoid those penalties by making an additional tax withholding on your final December paycheck. Simply take a look at what you’ve taken out in profit draws this year and calculate the approximate amount of income tax due on that amount. Then, withhold that amount from your final December 2006 paycheck.

If you can show the IRS that you’ve paid most or all of your previous year’s taxes within that same tax year, you will stand a very good chance of avoiding estimated tax payments entirely. And that means you can say goodbye to those late-payment penalties, too!

Here’s something else to consider: There is no requirement to make an extra withholding payment monthly or quarterly. You can wait until the end of the year and make one big payment. So, as long as you budget for that end-of-year payment, you can have the use of that money throughout the year. And why shouldn’t you? It’s your money!

3. Earning money in the most tax-advantaged way

Are you earning money in the most tax-advantaged way? Something I can absolutely guarantee hearing at least once a month from a client, seminar attendee, or listener usually goes something like this, “I formed an [LLC/S Corp/C Corp] because my [friend/colleague/partner/boss] told me [his/her] CPA said it was the best entity for…

I get so frustrated when I hear that. The truth is, there is no one “right answer.” Everyone’s situation is different, and so everyone’s structure and tax plan must be different, too.

Yet I’ve had people come to me and tell me they run their eBay business through an LLC because someone said LLCs were the best business structure. I have the unhappy task of telling them that they are probably paying more tax than then need to because they took that advice.

In fact, it’s really easy to get caught in this trap and pay more taxes than you need to by using the wrong (or no) business structure. Even if you’re talking to a professional, if they don’t ask the right questions, and you don’t volunteer the right information, you could wind up in an entity that doesn’t fit your business.

Active income vs. passive income

The rule here is whether the income is earned actively (you do or sell something) or passively (you receive rent from a property). If you’re making active, or earned, income, then you’ll pay more taxes than you should by operating through a sole proprietorship or through an LLC taxed as either a sole proprietorship or a partnership.

On the other hand, If you’re receiving passive income from property rentals, then an LLC taxed as either a sole owner (Schedule E) or a partnership will save you tax dollars you’d otherwise spend if you operated this business through a C or an S Corporation.

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By CREOnline Contributor

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