Deferring Tax Owing versus Getting Rid of It Altogether

There are two ways to minimize taxes for either yourself personally or your business: put them off until later or get rid of them altogether.

An example of a way to put them off until later is the use of a 401k (or, in Canada, an RRSP). If you put money into a 401k during the year, you can deduct it from your taxable income. For example, if you have $40,000 in income for the year and you put $10,000 into your 401k, you will be taxed on only $30,000. Sounds great! However, when you retire, you start to withdraw that money (along with all the investment growth), and at that point you will be taxed on that income.

So these types of plans only help you put off paying tax until later. That's still good, though. Tax later is almost always better than tax now.

What's preferable, though, is a permanent reduction of income taxes. There are many ways you can accomplish this:

1. Make sure that you are tracking all your business expenses. For example, if you are paying a lot of small things out of your own pocket on behalf of the company and losing the receipts, you are also losing the opportunity to pay less tax by claiming the expense. Although each individual receipt may not be for much, in total it may add up to significant lost dollars.

2. Take advantage of all applicable government grants and incentives. Many jurisdictions provide cash or tax incentives to small businesses to help stimulate the economy. Make sure that you are aware of these and are using them to their full advantage.

3. Make sure you are using available tax exemptions. For example, if your wife works full time in the business, make sure that she is being paid enough to "use up" her lower tax brackets. In most jurisdictions, income of spouse and children has to be commensurate with the actual work they are doing, but you still have some discretion in how much to pay them.