Do you want to owe less in taxes as a business owner, avoid tax season stress, and save massive amounts of time? Then you need a tax planning strategy.
We get it – you want to spend the least amount of time thinking about taxes. What if we told you that dedicating some time to your tax planning now could save your business time and money in the future? Just like your business wasn’t profitable from day one, neither will your tax strategy. As months and years go by, you’ll thank yourself over and over again.
We created this in-depth resource sharing 13 small business tax planning strategies that may make sense for your business. We go deeper than your typical credits and deductions. We’ll also discuss strategies like deferments, fringe benefit plans, and depreciation.
What is a tax planning strategy?
Business owners have a wide array of tax-saving strategies to consider. However, having all these options means you need a year-round plan to take full advantage of the available opportunities for your business.
Proactive tax planning can give you a firm understanding of what you can and can’t do. At a minimum, you can file your taxes knowing you didn’t make any mistakes, leaving you stress-free. At best, you can save your small business thousands of dollars using these tax planning strategies.
Most business owners find tax planning to be too confusing. It doesn’t have to be that way, especially when you break down each strategy piece by piece. That’s what we’re going to do.
#1 - Consider a tax status change
As a business owner, you have many options for structuring your business. You can operate as a sole proprietorship, limited liability corporation (LLC), partnership, S corporation, or C corporation.
You can change your status if your current structure no longer fits your business plan or tax strategy. To do so, file the appropriate document with the IRS or the state.
Pass-through businesses include sole proprietorships, partnerships, LLCs, and S corporations. These business structures are not subject to corporate income tax. Instead, these businesses report income on the individual income tax returns of the owners. C corporations are subject to double taxation. They are taxed once on the corporate level and again on the shareholder's return.
You need to know three things:
- The 2017 tax reform act lowered the corporate tax rate to 21%.
- The personal tax rate for a pass-through business ranges from 10-37%.
- Corporate shareholders are still subject to the personal tax rate, ranging from 10-37% after collecting dividends.
So you’re saying that a corporate shareholder could see 58% of their money disappear to taxes? Why would you ever classify a business as a corporation?
To get the facts for your business, you should retain the advice of a tax professional. There may be some advantages (beyond tax savings) to choosing a C corporation or a pass-through business structure.
#2 - Leverage tax deductions
A tax deduction is an expense you can deduct from your taxable income. Taking business deductions can help small business owners reduce their tax bills. The first place to start is by implementing good bookkeeping practices. Accurate and detailed financial records allow you to take advantage of all available deductions confidently. The IRS and federal government create tax deductions to spur economic growth.
Here are a few deductions you should be aware of as a small business owner:
- Qualified Business Income (QBI): This deduction allows qualifying business owners to deduct up to 20 percent of their QBI.
- Advertising and Promotion: The cost of advertising is 100% deductible. These expenses include building a website, business cards, promotional products, and social media advertising.
- Business Meals: You can deduct 50% of qualifying food and beverage costs. To qualify, the expense must be ordinary and necessary for business. The meal cannot be lavish, and the business owner or an employee must be present. Meals provided to employees are 100% deductible.
- Business Insurance: Business insurance premiums are tax-deductible. Examples include property, liability, group health, workers' compensation, and vehicle insurance.
#3 - Leverage tax credits
Tax deductions reduce how much of your income is subject to taxes. On the other hand, tax credits directly reduce the amount of tax you owe. Credits give you a dollar-for-dollar reduction in your tax liability. Side by side, deductions and credits together can dramatically reduce your tax liability.
One cool thing about tax credits is that some of them are refundable. Here’s an oversimplified example of how refundable tax credits work. If you qualify for a $1,000 tax credit but only owe $900 in taxes, the government will owe you $100.
Tax credits are provided by federal, state, and sometimes local governments. You can review available federal tax credits on the IRS’s website.
#4 - Defer or accelerate income
Deferring income means delaying when you claim the income, which can mean potential tax savings. For example, if you wait until January 2023 to bill a client instead of December 2022, you can lower your 2022 tax bill.
Accelerating income means the opposite.
When to defer income: | When to accelerate income: | ||||||||
#5 - Defer or accelerate deductions & credits
Similar to deferring income, deferring deductions and credits delay when you can claim these tax incentives on your tax return. Similarly, accelerating means the opposite. Suppose you’d like to lower your tax obligation for the year. In that case, you can accelerate the acquisition of equipment. Another acceleration strategy is paying bonuses to employees in December instead of in the new year.
#6 - Set up and fund a retirement account
Setting up and contributing to a retirement account can reduce your taxable income and help you save for retirement. As a business owner, you have several deduction-qualified savings account options. Contributing to a traditional IRA reduces your adjusted gross income for that year on a dollar-for-dollar basis.
What type of retirement plan is best for my business?
- Traditional and Roth IRAs are best if you have a side hustle and don’t plan to grow much. If you’re leaving a job to start a business, you can also roll your old 401(k) into an IRA.
- SEP IRAs work best for self-employed individuals who don’t plan on having employees in the future.
- Solo 401(k) plans are best for self-employed individuals who expect to make significant income in their business without employees.
- Simple IRAs work great for businesses with up to 100 employees. You’re required to make a matching contribution of up to 3% of employee compensation.
#7 - Reduce your adjusted gross income
The IRS defines adjusted gross income (AGI) as total gross income minus adjustments to income. Adjustments include educator expenses, student loan interest, alimony payments, or contributions to a retirement account.
Note: Confused by technical tax terms? We created a business tax glossary to give you answers.
These adjustments, subtracted from your total income on Form 1040, establish the adjusted gross income. Gross income includes wages, dividends, retirement distributions, capital gains, business income, and other income.
The most accessible way to lower your AGI is by contributing to a health savings account. If you participate in an eligible health plan, you may have the option to contribute up to $3,650 if the plan covers you and $7,300 for family coverage.
#8 - Offer employee benefits
Benefits are a great way to attract top talent to your company and lower your taxable income as a business. The higher an employee's wages, the higher your payroll taxes and their income taxes.
Health insurance is the first employee benefit that comes to mind, but many other benefits (classified as fringe benefits) can help keep your tax obligation low. Other nontaxable fringe benefits include athletic facilities, disability insurance, education assistance, and adoption assistance.
#9 - Hire your spouse or children
Hiring your spouse or children is an excellent way to keep money in the family. It’s also a tax-smart strategy that can lower your taxable income. There is no age limit to hiring your child as long. You just have to justify their work and that their compensation is reasonable. In 2023, you can pay your child up to $12,950 without withholding payroll taxes. You can also deduct their wages as a business expense.
If you hire your spouse, you can shift more of the cost to your company if your spouse is an employee. This allows your company to deduct 100% of the health insurance premiums it pays on behalf of your spouse - like it can for other employees. You can take advantage of other non-taxable fringe benefits to pay your spouse tax-free.
#10 - Consider relocating
Depending on your business structure, your business could save on taxes by relocating to a state or jurisdiction with lower taxes. For example, moving your corporation from California to Texas could save you 8.84% yearly on state corporate income taxes.
States With No Corporate Income Tax | States With No Personal Income Tax | ||||||||
Ohio, Washington, Nevada, Texas, South Dakota, and Pennsylvania | Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming |
Remember that states with no income tax make up for the lost revenue by raising property taxes, sales taxes, and fuel taxes.
Another way businesses can lower their taxes is through opportunity zones. The Tax Cuts and Jobs Act of 2017 established Opportunity Zones to provide tax incentives for investment in designated census tracts.
For example, Lyfe Accounting moved its headquarters to an opportunity zone in Atlanta. The opportunity zone credit provided a $3,500 credit for every job they created. This credit applied to over 30 employees more than paid for their move.
#11 - Deduct property
Let's say you took our advice from the last tip, moved your business, and bought a new property. Then you could deduct your business property from your taxes by taking the 179 deduction and filing Form 4562. For 2023, the maximum deduction is set at $1,160,000. You can only use this deduction for the year your business began using the property.
#12 - Utilize depreciation
Businesses can also utilize depreciation to write off the loss in value of an asset as a business expense. In the last tip, we talked about Section 179 deductions. This is where the IRS allows businesses to write off 100% of qualified property the year it was acquired.
Other assets like vehicles and equipment may also qualify for bonus depreciation, allowing a business to write off 100% of the expense in the first year. With the advice of a qualified tax accountant, you may choose to defer the depreciation throughout the asset's useful life (see tip #5) to provide tax relief in future years.
#13 - Have documents ready early
Ok, this last one is a bit of a bonus tip, but that doesn’t discount its importance. To take advantage of these tax planning strategies, you must start preparing early. Tax accountants are amazing, but they’re not magicians. Know what federal and state forms you must file depending on your business type. Contact your accountant early to discuss what strategies apply to your business. They will work with you to set up systems to stay eligible and compliant.
Speaking of staying “ComplYant,” there is one tool you can use to help you keep track of important tax documents and meet deadlines. You guessed it, that’s us. Whether you're self-employed, just started an LLC, or run a small team, we help simplify your small business taxes. Check out how ComplYant can become your new favorite tax assistant.
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