Tax planning for small business can be a real source of frustration and anxiety. How many times have you as a business owner realized that tax season was on top of you again…and you weren’t ready for it?
Unfortunately, there isn’t a magic wand that makes everything fall into place at the end of the year when it comes to your taxes. However, there are simple things you can do throughout the year to keep tax time from being something you dread.
In this post, we’ll show you several small business tax planning strategies that we’ve seen owners use to make their lives easier. And we’ll give you some easy ways that you can actually reduce how much you pay in taxes next year!
Tax Planning For Small Business
Everyone deals with finances. It’s just a matter of whether or not they do it wisely or poorly.
Wise planning is the key to reducing your tax liability successfully (and legally). So what exactly is tax planning? Let’s start there.
According to Investopedia, tax planning is “the analysis of a financial situation or plan to ensure that all elements work together to allow you to pay the lowest taxes possible.”
We like additionally look at it another way. Think of it as going beyond tax compliance and proactively implementing tax-saving strategies to maximize your after-tax income.
With our tax planning service, we help our clients look for tax-saving strategies throughout the year…not just at tax time. (It’s just one of the ways a good CPA makes your small business tax preparation easier.)
There are 3 core elements of good tax planning:
- Reducing your income
- Maximizing your deductions
- Taking advantage of credits
Just doing those basic things will go a long way toward improving your financial situation.
But we regularly encourage our clients to “expect more from your CPA”, so we won’t stop there. Here are several small business tax planning strategies and tax saving strategies that build off of the 3 ideas we just mentioned. Putting these strategies in place will help you hold on to even more of your hard-earned money.
4 Small Business Tax Planning Strategies
Tax planning strategies for small businesses begin well before tax season rolls around. Here are 4 steps that you can take now to put yourself in an even better position the next time you file.
- Think about your business structure. For some business owners electing to change the way their business is structured could help move them into a lower tax bracket.
For instance, if you operate a pass-through entity such as a sole proprietorship, partnership, LLC, or S Corp your business taxes are taxed at your personal tax rate since you file them with your individual 1040. But if you find yourself in the top 37% tax bracket, you could save money by changing your business to a C Corp that is taxed at a much lower 21%.
(Read more in another post we did on why your business structure matters.) - Take all of your deductions. Don’t leave good money on the table by overlooking valuable deductions. You might be surprised what the IRS will allow you to claim.
- Reduce your tax liability with credits. Where deductions reduce your gross income, credits directly reduce the amount of taxes you owe. There are several that small business owners can take advantage of by meeting various IRS requirements. You can find a full list of business tax credits on the IRS website. But here are a few examples.
- WOTC (Work Opportunity Tax Credit) – By hiring from certain target groups such as veterans, former felons, individuals enrolled in assistance programs, and others, you can receive a credit of up to $2,400 per hire.
- DAC (Disabled Access Credit) – If your company meets certain revenue and employee benchmarks, the IRS will give you credits of 50% of up to $10,000 towards expenses related to making your workplace more accessible for people with disabilities. This could include things like modifications to your property, adaptive equipment, or hiring a sign language interpreter.
- Health Insurance – If you are a small company (fewer than 25 employees) and the average salary is less than $58,000 (for 2022), you could receive up to 50% credit for insurance premiums you paid towards your employees’ health insurance if you qualify.
- WOTC (Work Opportunity Tax Credit) – By hiring from certain target groups such as veterans, former felons, individuals enrolled in assistance programs, and others, you can receive a credit of up to $2,400 per hire.
- Contribute to retirement. By putting money into a qualified retirement saving account–either for yourself or on behalf of your employees–you can significantly reduce your tax burden. Not only will you reduce your taxable income with your contributions, but you could receive a tax credit of up to 50% of the costs of starting a 401(k) or SEP program this year.
As with anything related to financial decisions, be sure to talk with your CPA or tax professional first to find out how any of these ideas would work in your specific situation.
For even more ideas, check out another post we did on this topic where we give you 10 tax strategies that will save your small business money.
Tax Saving Strategies For Business Owners
If you’re a small business owner, there are lots of tax-saving strategies you can take advantage of. For instance:
- Hire your children. Minors who are related to you can work in your company without having to pay taxes on the money they earn up to the first $12,000. After that, they’ll be taxed at a much lower bracket than yours (usually 10-12%). You could further reduce taxes by using the money they earn to invest in a 529 college savings account.
As the owner, you reduce your own taxes with the salary you pay them. And by creating a new job, you could even receive a tax credit from the IRS. As a parent, you will be teaching your children the value of work and saving for the future all at the same time. - Give generously. One of the benefits of earning more money is being able to better support the causes you believe in. Beyond the personal benefits of doing good with your wealth, you can also save on your taxes when you give to qualified nonprofit 501(c)(3) organizations.
Learn more about giving in our post last year on “Qualified Charitable Distributions (5 Things To Know Before You Give)”. - Set up an HSA. Saving money for future healthcare needs is always a good idea. It’s even more attractive when it can save you money on your taxes. When you contribute to an HSA for yourself or your employees, you automatically reduce your taxable income. Partner it with a high-deductible insurance plan for the best results.
Trust A Small Business Tax Planning Pro
There is no way to go into detail in one post on all the ways you can save money on your small business taxes. To find out more ways that you can simplify your tax planning and hang on to more of your money each year, trust a small business tax planning pro to guide you. They can make the process so much easier!
We’ve been doing tax planning for our clients for over 40 years now. So schedule a call today to learn how we can help you too!
