How Small Businesses Can Use Tax Laws to Their Advantage

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Written By AndrewPerry

Founded in 2015 by a group of passionate legal professionals and enthusiasts, FlowingLaw started as a small blog. Today, it's a thriving community where ideas, expertise, and legal advice flow freely.





Small business owners have an array of legal issues to consider while operating their business, with the laws of taxation being one of the most critical aspects of law to actively monitor. Business owners must make sure that their practices fall within the appropriate jurisdictional guidelines of their area, all while making sure that their tax liability is reasonable lessened; if tax laws are not closely followed, a business can face dire penalties, including considerable monetary fines or possible incarceration. Even though a small business owner could run into significant legal trouble as the result of a tax law, most do not realize that tax laws can also provide a venue for their business to enhance earnings by conserving the amount of money spent on taxes. Small businesses have a variety of ways to use tax laws to reduce their tax liability; the following article will address the primary tax issues faced by small businesses and guide the owner on how to turn tax obstacles into an advantage.

Each region has its own set of tax laws that govern the financial and legal guidelines for a business, all of which can alter the way a company conducts business from one area to the next. However, there are a variety of common elements that virtually all tax laws have in common, despite the system in place or the region; most of these elements can be a huge asset to the small business. A limited liability company is one of the first steps a owner should take when establishing their company. When considering an effective income tax strategy, small businesses will find looser guidelines with a limited liability company, as opposed to other forms of incorporation. A company owner that opts to become a corporation will be forced to list all profits as a source of income; not only does this create a significant, yet undue, federal tax liability, but it will also create a larger tax liability to the company’s state taxing authority. One strategic way for a corporate business owner to reduce his tax liability is to create a pay structure for himself through dividends of the company’s shares. If the owner is paid a salary from his own corporation, not only does the corporation have a tax liability for the wages, but the owner will face another layer of taxation on the wages as an employee.

In order to reduce tax liabilities, capital allowances are a key tax strategy that every business owner should become familiar with and take advantage of. Tax laws allow business owners to compensate for the cost of large assets needed to operate the company over a specified period of time, which is what taxing experts refer to as capital allowance. The business owner is able to reduce his annual taxable income, as these expenses become deductible.