Small business owners usually dread dealing with taxes. However, by taking advantage of a few key tax strategies, you can make the process a lot smoother and manage to save some money too!
With the end of the year quickly approaching, now is the time to take care of saving big on your taxes. A little bit of attention to these things now means more money in your pocket later. Don’t leave good money on the table for the IRS to snatch away!
Here are 10 money-saving tax strategies for your small business:
1. Take Your QBI
In 2018, the Tax Cut and Jobs Act created the Qualified Business Income (QBI) deduction. It allows you to deduct 20% from your taxable income if your business is structured as a “pass-through” entity (where the business income is treated as the personal income of the owners). This can be done whether your business is a sole proprietorship, S Corp, partnership, or has shareholders/owners.
It’s one of the easiest deductions to take advantage of because you literally don’t have to do anything to receive it once your company is structured appropriately. Check with your tax professional to make sure you are eligible, though. They can help you get set up the right way.
2. Fund Retirement
It may be hard to imagine today when every waking moment is consumed with running your business, but one of these days you won’t be. Hopefully, you’ll be enjoying a peaceful retirement doing relaxing things in beautiful places. To get ready for that future, though, you have to be sure to set money aside now.
Setting up a qualified retirement plan for you and/or your employees is a great way to prepare for the future and save on your business taxes today. Tax-deferred plans like IRAs, 401(k)s, or 403(b)s let you hold off on paying taxes on those contributions until you withdraw them later.
3. Take Advantage of Credits
The IRS has quite a few Business Tax Credits that you may be able to take advantage of as a way to save money. Many of them are very specific (Mine Rescue Team, Railroad Track Maintenance, etc.). However, you are probably already involved in many of the items listed below. The Balance SMB goes into more detail in their article on these 6 Tax Credits to Cut Your Business Taxes:
- Employee Retention
- Sick Leave/Family Leave
- Employee Health Care
- ADA Accommodations
- Energy Saving
- Hiring from Certain Categories
4. Track Your Expenses
In previous blog posts (like this one on how to “Keep Up With Receipts Like a Pro”), we’ve talked about how important it is to record all of your business expenses. Doing so lets you track your spending, discover errors in reconciliation, and take advantage of deductions at tax time.
The IRS allows businesses to deduct expenses that are “ordinary and necessary.” These are things that are commonly purchased within your industry or are helpful for running the day-to-day operations of your business.
However, you need to be able to justify whatever deductions you claim on your taxes, so you need to keep good records of what you spend your money on. A little work upfront to set up a good receipt management system can save you a lot of money in the long run!
5. Deduct Equipment and Vehicle Purchases
For purchases beyond expenses related to the regular operation of your company, like new equipment or company vehicles, the IRS has established Section 179. Under this part of the U.S. Tax Code, small and medium-sized businesses can deduct significant portions of large expenses.
We recently covered this topic in more detail as it relates to farmers and agricultural operations. However, Section 179 is useful to any kind of business with qualifying expenses. Here’s the post we did titled “How to Save on Your Farm Taxes by Knowing What Vehicles are Eligible Under Section 179.”
6. Make Donations
If you do decide to upgrade any of your equipment, don’t miss out on the opportunity to turn those old items into tax deductions! By donating office furniture and equipment to charitable organizations, you can claim the value of those items on your tax return…if it’s still usable and in reasonably good condition.
7. Give gifts
Did you know that you can deduct a portion of things you give away? Businesses can deduct up to $25 of gifts given to customers and vendors. However, you can’t take a deduction on entertainment expenses unless the event is directly related to your business.
8. Write off old business debts
Do you have a customer or two who hasn’t paid yet and you don’t expect that they ever will? If you are not a cash basis taxpayer, you can write off those bad debts on your taxes this year and manage to save some money that way. (For specifics from the IRS on what does and does not qualify, see their article on Bad Debt Deduction.)
9. Win With Losses
If your business is just getting started, it may take a while to start realizing a profit. Many startups spend quite a bit in upfront capital, and it may take some time to build up a significant customer base.
In that case, you might actually operate at a loss for those first few years. You can use Those losses as a net operating loss (NOL) deduction on future income taxes after you start making a profit.
The IRS has loosened some of the NOL restrictions due to COVID-19 and how it affected the U.S. economy, so check with your tax advisor if this deduction might apply to your situation.
10. Pay More in Benefits
If you have an employer-sponsored healthcare plan in place for your workers, consider contributing more towards their premiums instead of giving them a raise. It can be a win-win because you pay less in employment taxes, and they have less taken out of their checks for healthcare.
Always Check With A Pro!
Before attempting to take any deductions on your income taxes, it’s always best to consult a tax professional who knows the laws inside and out. They can go into a lot more detail than a blog post! (Though, you can learn more about our tax services on our website.)
At CRS CPA, we’ve been helping small business owners find extra money through tax deductions for over 40 years! We believe you deserve to keep as much of your hard-earned money as possible.
Schedule a call with our team of tax experts, and watch your tax savings roll in!