7 Smart Small Business Tax Planning Strategies to Help You Save Money

Tax season can be one of the most stressful parts of running a small business, but it’s also one of the most important. Smart tax planning creates a strong foundation for business success. By strategically managing taxes, small business owners can save money, maintain legal compliance and pave the way for long-term growth.

Let’s explore some tax strategies small business owners can use to not just survive tax season, but to save money and establish the groundwork for business success.

1. Choose the Right Business Structure

Your business structure can have a big impact on your taxes. Each option comes with different tax implications that are important to understand. It can be beneficial to consult a tax professional who can help you determine the right business structure and what it means for your taxes.

Sole Proprietorships. If your business operates as a sole proprietorship, your business income will be reported on your personal tax return. This is because sole proprietorships are not separate legal entities. When tax time rolls around, you’ll need to file a Schedule C (Form 1040) to report profits and losses from your business as well as a Schedule SE (Form 1040 or Form 1040-SR) to report your Social Security and Medicare taxes. You bear full responsibility for any taxes, debts and legal issues that may arise.

Partnerships. Partnerships are known as pass-through entities, meaning the business itself doesn’t pay income tax. Similarly to a sole proprietorship, profits and losses are passed on to the individual partners, who then report their respective shares on their personal tax returns.

LLC. A limited liability company (LLC) is a separate legal entity and there is some flexibility when filing taxes. The IRS will allow qualifying LLCs to file as a sole proprietorship or partnership and be included in the owners’ personal tax return — or they can file as an S corporation or C corporation if the LLC has elected to be taxed as such. S corps and C corps can offer tax advantages for certain businesses, but they can have more complex tax filings.

2. Make the Most of Your Tax Deductions

A deduction reduces the amount of business income that can be taxed, and identifying and documenting your deductions can help you save a significant amount of money. You can maximize your deductions by carefully keeping track of your business expenses. Staying organized, keeping up to date with tax laws and consulting a tax professional can help you make the most of your deductions.

Here are few common business deductions:

• Home office deductions.
• Internet and phone expenses.
• Travel and entertainment.
• Education expenses.
• Professional fees.

3. See if You Qualify for Any Tax Credits

Tax credits are another way you can save money on taxes. Unlike deductions which reduce your taxable income, tax credits directly reduce the amount of taxes you owe. Here are a few common tax credits your business may be able to take advantage of.

• Work Opportunity Tax Credit (WOTC). This provides a tax credit to companies that hire individuals from certain targeted groups who have faced barriers to employment.
• Small Employer Health Insurance Credit. Businesses that offer health coverage to their employees can claim this tax credit to offset the cost.
• Clean energy credits. If your business invests in clean energy projects, you may be eligible for a tax credit.

You can find a full list of business credits and deductions on the IRS website.

4. Defer or Accelerate Your Income

Deferring Income

If you had a really successful year, you may want to consider deferring your business income until the following tax year. This helps reduce the amount of income that you’ll need to pay taxes on. Depending on your accounting style this can look different.

Cash-based businesses. In cash-based accounting, transactions are recorded when cash changes hands. To defer income and create tax savings, you simply postpone billing or hold off on invoicing and receiving payments.

Accrual-based businesses. Accrual-based accounting records transactions when they happen. For example, if you provide a service to a client in March but don’t receive the invoice payment until April, the income would be recorded in March. It can be trickier to defer income when you use this system — you’ll need to adjust when your services are provided or products delivered.

Income Acceleration

There are a few reasons you may want to think about accelerating your business income. It can be beneficial if you think you’ll be in a higher tax bracket next year, or if you want to take advantage of certain deductions, credits or tax benefits that may not be available later on. By recognizing income early, you could potentially lower your tax liability over the long term. Consulting with a tax professional can help you make the right moves.

5. Set Up or Contribute to a Retirement Plan

Retirement plans can help you save money on your taxes in a few different ways.

• Personal taxable income. Contributions to a traditional 401(k) or other qualified retirement account can be deducted from your personal taxable income. This can help you get a lower tax bill.
• Payroll taxes. A matching contribution to a retirement plan doesn’t require you to pay payroll taxes on the amount your employer contributes. This makes it a cost-efficient way to compensate employees.
• Corporate tax bill. You may be able to deduct tax-deductible employer contributions and some fees to the institutions that manage the retirement plan from your tax bill.
• Retirement Plans Startup Costs Tax Credit. You may qualify for a tax credit when you set up a new qualified plan such as a SEP-IRA, SIMPLE IRA or 401(k).

6. Write Off Your Equipment and Real Estate Purchases

The IRS allows small businesses to write off the cost of certain types of equipment and property over a period of years through depreciation deductions. This type of dedication can provide significant tax savings.

Section 179 Deduction. This deduction allows you to deduct the full cost of some types of equipment or property up to a certain dollar amount. The maximum deduction is around $1 million and may be adjusted annually.

Bonus depreciation. This tax incentive allows you a higher depreciation deduction in the first year after you’ve purchased qualifying equipment or property. This aims to encourage businesses to invest in growth.

7. Hire a Tax Advisor

Tax strategies are complicated. Tax laws change constantly and many regulations only apply to certain scenarios and types of businesses. A tax advisor can help guide you through this process and help you make the best decisions to lower your tax burden and set your business up for success. Here are a few ways they can help.

• Stay up to date on the tax changes that may impact your business.
• Ensure you stay compliant with local, state, and federal requirements.
• Help you through audits and disputes.
• Help develop a long-term tax strategy in line with your business goals.
• Advise you on how business decisions can impact your taxes

Here’s What the Experts Have to Say

“My number one tip to help small business owners save money on taxes is to keep good books and records!

“I can’t tell you how many small businesses don’t keep up their bookkeeping, much less a profit and loss statement.

“Remember, you can’t deduct an expense if you don’t remember you incurred it, and that’s where bookkeeping — which is a record of all of your business’ transactions during the year (so nothing gets forgotten) — comes in.

“Also, small business owners should keep in mind that bookkeeping is much easier if one has a dedicated business bank account for their business!

“There are so many low-cost and even free options when it comes to business bank accounts these days that you really have no excuse but to stop running your business income and expenses through your personal bank account and start running them through a proper business bank account!”

Logan Allec, CPA
Choice Tax Relief

“Maximizing deductions is one of the most important, if not the most important, tax-saving strategy there is. There are so many different types of deductions available to you as a business owner, including many you’ve probably never considered and even more you’re not taking full advantage of.

“First, let’s cover what it actually means to maximize deductions. Because chances are, you’ve probably heard a myth or two about this.

“A lot of business owners are told that to save on taxes, they need to go out and buy things.

“Go buy a truck” (that you don’t need)

“Go buy a new TV for the office” (that you don’t need)

“This is not true. Saving on taxes is about maximizing deductions not by adding unnecessary expenses but by finding business purposes in your regular spending.

“Pulling this off comes down to the difference between after-tax and pre-tax dollars.

“Every time you spend after-tax dollars that could have been pre-tax dollars, you lose. Every time you turn after-tax dollars into pre-tax dollars, you win.

“This is something I’m always saying to business owners. Here’s what I mean.

“After-Tax Dollars

“After-tax dollars are money you spend after paying taxes on it.

“For example, as a W-2 employee, taxes are taken out of your gross wages before they get to you. You’re then paid whatever’s left. Your take-home pay is “after-tax” dollars.

“If you then go and buy a desk and chair for your home office for this W-2 job, you’re using after-tax dollars and getting no tax deduction for these expenses.

“Pre-Tax Dollars

“Pre-tax dollars are money you spend before being taxed. Pre-tax expenses offer upfront tax advantages.

“For example, as a business owner, you have your sales or revenue—what you make—and your business expenses—what you spend. The business expenses offset the revenue and you’re left with a profit, which is taxed.

“Spending on business expenses is considered “pre-tax” because the money has not yet been taxed. This is an incredible advantage for you as a business owner.

“Let’s go back to that same example we discussed earlier but now look at it from a business owner perspective. That home office you use contains many partially-deductible expenses, including utilities, internet, maintenance, and even lawn care. That desk and chair you bought are also deductible.

“The Takeaway

“Spending money on your business can save you money on your taxes because you’re using pre-tax dollars that would otherwise be after-tax dollars. This is why you should always be on the lookout for business purposes in your everyday spending to qualify for more deductions.

“Here’s an important mantra: The goal as a business owner is to turn as many after-tax dollars into pre-tax dollars as legally possible.

“This is the foundation to hundreds of tax strategies.”

Mike Jesowshek, CPA
www.TaxSavingsPodcast.com
www.TaxElm.com

“The top tip for small business owners to save on taxes is to strategically plan taxes like they plan their business operations and finances. Business tax planning is a crucial part of overall financial strategy. Beyond claiming deductions and credits, it involves choosing or optimizing your business tax classification when it’s time to do it.

“For example, if you are an LLC, your default tax classification is a partnership or a sole proprietorship, depending on the number of partners. If you are starting your business, you’ll probably have many uncertainties surrounding your income level, growth strategy, and operational activities. In that case, sticking with the default LLC tax classification might be your best option.

“However, if you have a stable income stream and earn enough money to pay yourself as an “employer” and an “employee” in your company, converting a partnership or a sole proprietorship into an S corporation could lower your taxes. Why? This move potentially mitigates social security and Medicare taxes, as these obligations are based solely on the “reasonable salary” rather than all your taxable income.

“On the other hand, if you plan to reinvest all or most of the business profits back into the business, a C corporation might be a better choice than the default LLC tax classifications. By becoming a C corporation, you can take advantage of lower corporate tax rates on retained earnings, allowing you to reinvest more money into the business while potentially reducing your immediate tax liabilities.”

Ines Zemelman, EA
https://tfx.tax/