Tax preparation techniques to lower your small business taxes in 2023.
It can be surprising how much money you owe in taxes each year when your small business’s income increases. Your tax obligations could be excruciatingly high, ranging from self-employment taxes to state and federal income taxes. Running a successful business requires careful tax planning. Learn how to reduce your small business taxes each year by reading on.
Proactive tax preparation is more valuable the more money your organization makes. The majority of small firms will require a few of the following tax-planning techniques.
- Defer income: Postpone billing customers or collecting payments until the next tax year to reduce your current year’s taxable income.
- Accelerate expenses: Pay bills and make purchases before the end of the year to take advantage of deductions in the current tax year.
- Take advantage of tax credits: Research and apply for tax credits that your business may qualify for, such as the Research and Development Tax Credit or the Employee Retention Tax Credit.
- Maximize deductions: Make sure you’re taking advantage of all the deductions your business is eligible for, such as those for equipment and vehicle expenses.
- Choose the right business structure: Selecting the right business structure, such as an S corporation or LLC, can have a significant impact on your taxes.
- Take advantage of bonus depreciation: Bonus depreciation allows you to immediately deduct a portion of the cost of certain property, such as equipment and machinery.
- Make the most of Section 179: Section 179 allows you to immediately deduct the cost of certain property, such as equipment and machinery, up to a certain limit.
- Utilize cost segregation: Conducting a cost segregation study can help identify assets that can be depreciated over shorter periods, resulting in larger deductions.
- Use the cash method of accounting: The cash method allows you to report income and expenses when they are received or paid, as opposed to when they are earned or incurred.
- Consider a home office deduction: If you use a portion of your home for business, you may be able to take a home office deduction.
- Take advantage of retirement plan contributions: Setting up and contributing to a retirement plan can provide significant tax benefits for your business.
- Make the most of health savings accounts: HSAs can help small business owners save on taxes by allowing pre-tax contributions for qualified medical expenses.
- Consider a charitable contribution: Making a charitable contribution can provide a tax benefit to your business, while also supporting a good cause.
- Work with a tax professional: A tax professional can help you navigate complex tax laws and regulations and identify tax-saving strategies specific to your business.
1. Look for ways to lower your taxable income
Although it should go without saying, the first step in tax preparation for your company is to find strategies to lower your Adjusted Gross Income (AGI). I can’t tell you how many high-income business owners whose tax returns I’ve seen had virtually no income tax deductions.
Your income may remain in lower tax bands, allowing you to take advantage of greater tax credits or avoid higher taxes like the Medicare surtax.
Your tax returns may be affected by some strategies you use to reduce your AGI. This covers things like individual contributions to retirement accounts, itemized deductions (including mortgage, property tax, and charitable donation deductions), and even contributions to a Health Savings Account (HSA).
2. Employ Employee Fringe Benefit Plans
In the US, employee pay has recently increased, which has increased the cost of employment taxes. Providing your staff with fringe benefits is one method to ease this financial burden on your company.
Employer costs for employment taxes rise along with pay increases. Offering fringe perks as part of employee salary is one approach to get around this.
You might wish to think about tax-exempt fringe perks like medical insurance, group life insurance, child care help, reimbursements for travel expenses, staff lunches, or even tuition reimbursement.
Tax planning can help you save more money for retirement, making it simpler and faster for you to achieve a happy and prosperous retirement.
3. Improve Your Retirement Strategy
The maximum pre-tax contributions will be possible when using the appropriate retirement plan. Greater contributions result in greater tax deductions, which lowers the overall tax burden.
The strategy you devised several years ago might not be ideal for where your company is right now. I just had a conversation with a business owner who makes seven figures but still invests in a traditional IRA. Although it wasn’t much, the $6,000 contribution was still better than nothing. Her contribution limits for 2021 were increased to over $600,000 by putting up a 401(k) plan and Cash Balance Plan.
Even if you already have a 401(k) plan, changing it so that you can contribute the maximum each year may be advantageous.
4. Include A Cash Balance Plan
For many business owners, a 401(k) plan will be a crucial tool for retirement planning; but, higher-income business owners may find the Cash Balance Plan to be more advantageous.
You should carefully consider setting up a Cash Balance Pension plan with the help of your fiduciary tax planning Financial Planner and CPA if you are 50 years of age or older and make $500,000 or more per year.
Not all financial advisors are willing or qualified to set up pensions because they are challenging to set up and manage. Similarly, regardless of how great the tax savings may be, not all business owners are able or willing to donate several hundred thousand dollars annually.
5. Take Carryover Deductions Seriously
You might not be able to claim some tax credits or deductions in some years. Certain tax deductions may be carried forward to be used in a subsequent year if you are unable to use them in the current year.
The home office deduction, net operating losses (with some restrictions), business credits, and even capital losses are a few tax deductions that you might be able to carry forward.
6. Employ accountable strategies
If you employ people, you probably reimburse them for certain costs. This could apply to travel or even activities like entertainment. You can pay employees back for business expenses through an accountable plan without having to disclose the money as employee income. You would need to pay more payroll taxes if your employees earned more money.
To take advantage of the automotive tax… [+] deduction as a business owner, you don’t necessarily need to be traveling in a Rolls Royce to a private plane.
7. Make the most of your car’s tax deductions
I work as a financial advisor in Los Angeles, where it takes a while to travel anywhere due to traffic. Coupled with the fact that many people drive pricey luxury cars, a lot of business-owner clients would profit by writing off their actual auto expenses.
On the other hand, I am aware of people who live in different regions of the nation who travel more than 100 miles every day. They would probably gain more from utilizing the 2022 IRS mileage rate of 62.5 cents per mile.
8. Put Taxable Income Off for Later Years
If you had a banner year, you might want to attempt deferring some of your income to succeeding ones.
Although this tactic won’t get rid of taxes, it can occasionally result in small financial gains.
On the other hand, if your taxable income is high, you might want to prepay some expenses before the year is up.
Employing a member of your family can result in tax advantages.
9. Employ Members of Your Family in the Business
For a firm to be successful, a village is needed. Does your partner or family member lend a hand in any way? They might pay less in taxes if you put them on the payroll for the work they do.
As long as you adhere to IRS income tax thresholds, children can work without paying taxes. As a bonus, assist them with funding a ROTH IRA with their earnings.
You might be able to double the above-mentioned retirement plan contributions if you bring your spouse onto the payroll. Additionally, it can boost their potential Social Security benefits. You will have to pay payroll taxes on their income, which is a disadvantage.
10. Do you have the appropriate business entity?
The tax efficiency of your company may be considerably increased by using the appropriate business organization (for your unique operation). Every corporate entity has advantages and disadvantages (Sole Proprietor, S-Corp, LLC, Partnership). To be sure you are employing the right company structure for your organization, consult with your tax planning experts.
Using a home office? The deduction for home offices may apply to you.
Do You Qualify for the Home Office Deduction? Getting 12.
Due to the COVID pandemic, more people are now working from home. Take advantage of this tax break if you are eligible.
Information on the home office deduction
11. Keep up with changes to the small business tax laws
Working with a CPA (or another tax professional) and a financial planner who specializes in tax planning can help you stay up to date on any changes to the tax code that may have an impact on your company.
You don’t need to become an expert in taxes, but whenever you get news about new tax rules or significant tax legislation, try to figure out how it might influence your taxes.
How The Rich Avoid High Tax Bills By Using The “Buy, Borrow, Die” Strategy
From David Rae 14. Speak with a tax advisor
Tax planning is something you do throughout the year, not just when you file your taxes. When tax season comes around, most tax-planning tactics are no longer applicable.
A crucial aspect of running a business is tax planning. You will gain from working with a tax-planning specialist even if you appreciate keeping up with the latest tax rules and adore bookkeeping.
High-level tax law knowledge and tax filing for your firm are two very distinct things. A mistake can result in exorbitantly costly additional taxes and penalties.
Difference between filer and non-filer:
In Pakistan, a filer is an individual or business entity that is registered with the Federal Board of Revenue (FBR) and files taxes regularly. A non-filer, on the other hand, is an individual or business entity that is not registered with the FBR and does not file taxes. The FBR has implemented various measures to encourage people to become filers and to penalize those who remain non-filers. This includes fines, penalties, and restrictions on certain transactions for non-filers.