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Tax-planning strategies for service-based businesses are a little unique in some ways.
For service-based businesses, tax planning is essential to maintain profitability, prepare for growth, and avoid costly surprises. Whether you operate a consulting firm, a law office, a marketing agency, or any other service-based company, proactive tax strategies can make a substantial difference. In this guide, we’ll explore some of the most effective tax planning strategies that can help reduce your tax burden and streamline your financial processes.
Keep Detailed Records of Business Expenses
Every expense that’s ordinary and necessary to operate your business can potentially be deducted, lowering your overall taxable income. Common deductions for service-based businesses include:
- Advertising and marketing costs
- Office supplies, software subscriptions, and equipment
- Professional fees (such as legal or accounting services)
- Rent for office space or co-working memberships
- Travel expenses related to business meetings
Maintaining well-organized and timely records is essential for claiming these deductions. Use bookkeeping software to automate the process and make it easier to produce documentation if the IRS requests verification.
Leverage Home Office Deductions
If you run a service-based business from home, you may be eligible for a home office deduction, which can cover a portion of rent, utilities, and other home expenses. To qualify, your home office must be used regularly and exclusively for business. The IRS offers two methods for calculating this deduction:
- Simplified Option: Deduct a fixed rate of $5 per square foot of home office space, up to 300 square feet.
- Regular Method: Deduct a percentage of home-related expenses based on the portion of your home dedicated to the business.
The regular method generally yields a higher deduction, but it requires more detailed record-keeping. Always consult with a tax professional to determine which approach is best suited for your business.
Plan Your Quarterly Estimated Taxes
Service-based businesses often face unpredictable income patterns, making it challenging to calculate quarterly estimated taxes accurately. Still, paying quarterly estimates is necessary to avoid underpayment penalties from the IRS. Estimate your quarterly taxes by calculating your expected income, deductions, and credits for the year, and divide by four.
When planning for quarterly taxes:
- Use prior years as a baseline but adjust for growth or other changes in your revenue.
- Reassess quarterly to account for unexpected income fluctuations, making any necessary adjustments.
Automating your quarterly payments through the IRS’s Electronic Federal Tax Payment System (EFTPS) can help streamline the process.
Utilize Tax Credits
There are a variety of tax credits that service-based businesses can potentially claim. These credits directly reduce your tax bill, often resulting in more savings than deductions alone. For example:
- Research and Development (R&D) Tax Credit: Even if you’re not in manufacturing, your business may qualify if you’re developing new software, processes, or improvements.
- Work Opportunity Tax Credit (WOTC): Available if you hire individuals from certain targeted groups, such as veterans or long-term unemployed persons.
- Small Business Health Care Tax Credit: Available to businesses that provide health insurance for employees.
Researching available tax credits can take time, but the potential savings are well worth the effort.
Invest in Professional Tax Guidance
The complexity of tax law, particularly with frequent changes, makes it challenging for business owners to keep up without professional assistance. An experienced tax advisor can provide guidance tailored to your specific needs, identify often-overlooked deductions, and ensure compliance with all filing requirements. Many business owners find that the cost of professional advice is well worth the tax savings and peace of mind it brings.
Trust the Professionals at the Harding Group
Unlike other accounting firms, The Harding Group, located in Annapolis, MD, will never charge you for consultations and strive for open communication with our clients.
Are you interested in business advising, tax preparation, bookkeeping and accounting, payroll services, training + support for QuickBooks, or retirement planning? We have the necessary expertise and years of proven results to help.
We gladly serve clients in Annapolis, Anne Arundel County, Baltimore, Severna Park, and Columbia. If you are ready to take the stress out of tax time, contact us online or give us a call at (410) 573-9991 for a free consultation. Follow us on Facebook, Twitter, YouTube, and LinkedIn for more tax tips.