As a business owner, proactive tax planning is essential for maximizing your bottom line. Don’t wait until tax time to think about strategies that can save your business money.
Implement comprehensive tax planning throughout the year using the following techniques.
Choose Your Business Entity Wisely
Your business structure directly impacts how your business income is taxed. Consider the tax implications of these entity choices carefully before making a decision:
- Sole Proprietorships and Partnerships: These are considered “pass-through” entities, meaning business income passes through to the owners’ tax returns. This avoids the double taxation that C corporations face. However, it results in self-employment tax, which can be substantial. These entities are relatively simple and inexpensive to set up and administer.
- S Corporations: Also enjoy pass-through tax treatment, avoiding double taxation at the corporate and individual levels. Owners pay income tax but not self-employment tax on their share of business income. S corps have eligibility rules regarding several shareholders (100 max) and the type of stock permitted. Ownership is limited to US citizens and resident aliens.
- C Corporations: C corps pay taxes on business income at the corporate rate. Dividends distributed to shareholders are also taxed at individual rates. This double taxation generally results in higher overall tax liability. C corps do limit owners’ liability. Setting up and administering a C corp is more complex and expensive.
Thoroughly research the tax and legal implications when deciding on your business structure. Consult with attorneys and accountants to determine which entity optimizes liability protection and tax treatment based on your situation. Don’t let tax considerations drive the decision entirely, but do make it a significant factor.
Leverage Deductions and Credits
Tax deductions and credits can significantly reduce your business’s taxable income and overall tax burden. Be diligent about maintaining the documentation needed to claim them if audited.
Common Business Expense Deductions
- Equipment, supplies, utilities, insurance, rent, licenses, fees
- Home office deduction if space is used regularly and exclusively for business
- Vehicle mileage deduction at standard IRS rate (58.5 cents per mile in 2022)
- Travel, meals, and entertainment at 50%
- Health insurance premiums
- Retirement plan contributions
- Salaries, wages, bonuses
- Contract labor
- Advertising
- Legal and professional services
- Repairs and maintenance
- Interest on business loans and credit cards
- Business bank fees
Tax Credits
- Research and development expenses
- Energy efficiency improvements like lighting and HVAC upgrades
- Disability access expenditures
- Small business health care tax credit if paying employee health insurance
- Work Opportunity Tax Credit for hiring certain disadvantaged groups
- Empowerment Zone Tax Credit for operating in certain rural or urban areas
Retirement Saving Accounts
Certain retirement plans allow contributing pre-tax income to employees’ and owners’ retirement accounts. This lowers taxable business income in the current year.
401(k)s- Easy to set up and administer 401(k) plans for any business with employees. In 2022, employees can contribute up to $20,500 each with a $61,000 total limit, including employer contributions.
SEP IRAs- Allows up to 25% of net business income or 20% of employee income to be contributed, with a $61,000 limit per participant—minimal administration requirements.
SIMPLE IRAs- Let employees contribute up to $14,000 plus employer match up to 3% of income—lower administrative costs than 401(k)s but required employer contributions.
Solo 401(k)s- Ideal retirement plan for a business owner without employees. Allows up to $61,000 total contributions per owner aged 50 or older. Must file IRS Form 5500 annually once over $250,000 in assets.
Optimizing Accounting Methods
Choosing the proper accounting method can reduce tax liability.
Cash vs. Accrual Accounting
Cash basis recognizes income when cash is received and expenses when money is paid out. It is simpler but may mismatch revenue and costs across tax years.
Accrual basis records income when earned and expenses when incurred—better ongoing profit view but more complex. Accrual taxpayers may qualify for more deductions.
Most businesses with over $26 million in annual gross receipts must use accrual. Others can choose based on their situation.
Section 179 Expensing
Section 179 deduction allows businesses to immediately deduct up to $1,080,000 of qualifying asset purchases like equipment, furniture, and off-the-shelf software. This reduces taxable income in the year of purchase versus depreciating over time.
Hire a Tax Pro
With complex and changing tax laws, partnering with a tax professional can help business owners maximize savings and avoid missteps. A CPA or Enrolled Agent can guide on the following:
- Setting up proper record-keeping systems to track income and expenses
- Making quarterly estimated tax payments accurately
- Properly classifying workers as employees vs independent contractors
- Sales tax rules for your state and local jurisdiction
- Tax notices and audits
- Business structure changes
- Buying, inheriting, or selling a business
- Exit planning for retirement
Don’t go it alone on business taxes. A competent tax advisor’s guidance can yield substantial tax savings for your company for many years. An upfront investment in proper tax planning and preparation will pay for itself many times over.
Implementing comprehensive tax planning strategies throughout the year enables savvy business owners to keep more of their hard-earned profits.
Follow these tips in partnership with tax professionals to minimize your business’s tax bill through smart planning. Keep up to date on tax law changes and seek multiple professional opinions for significant decisions. You can secure your business’s financial future with the proper tax knowledge and preparation.
