August 29th 2023.
What is Small Business Tax Planning?
As a small business owner, you know taxes are one of the biggest expenses your company faces. A small business tax planning strategy helps you maximize your tax benefits and reduce your tax liability.
Reducing Your Adjusted Gross Income
One of the ways to reduce your AGI is to adjust your personal tax return or reduce your business’s income. When it comes to personal returns, you can find eligible deductions and credits, such as retirement plan contributions, mortgage interest, or student loan interest.
When it comes to business income, you can look for various expense deductions, employee credits, and more.
Should you change your Tax Status?
The type of structure you choose for your business affects how you get taxed. If you’ve outgrown your current structure, you may want to consider changing your status to help with taxes.
Pass-Through Entities & Corporations
Sole proprietorships, partnerships, LLCs, and corporations are all taxed differently. Pass-through entities, such as sole proprietorships, partnerships, and LLCs, have their income pass through the business to the business owner, who then report the income on their individual tax returns. On the other hand, a corporation is taxed at the business level, and then each owner includes their income from the business on their personal tax returns.
The Tax Cuts and Jobs Act of 2017 lowered the corporate income tax rate from 35% to 21%, making it a more attractive option than it previously was. However, before you decide to change your structure, make sure to consult a tax professional and ensure the change is right for your business.
What Tax Deductions are available for Small Business?
Tax deductions reduce your reportable income, resulting in a lower tax bill. Here are some deductions you may be able to claim: the qualified business income deduction, expense deductions, home office deduction, depreciation expense, business vehicle deductions, financing expense deductions, and retirement plan deductions.
What Tax Credits are available for Small Business?
Tax credits reduce the taxes you owe or increase your refund. Here are some available business tax credits: the work opportunity tax credit, the disabled access credit, and the health insurance credit. These credits can be very beneficial, so make sure to speak with a tax professional to find out which credits you can claim.
Small business owners might be eligible for the Small Business Health Insurance Credit. This tax credit is available to businesses that pay employees' health insurance premiums. To qualify, the business must have fewer than 25 full-time employees, and the average annual employee wage must be less than $56,000.
Additionally, the business must pay at least 50% of employee health insurance premiums. Eligible businesses can receive a credit of up to 50% of their health insurance costs.
What is Small Business Tax Planning?
As a small business owner, you're aware that taxes are one of your company's biggest expenses. Small business tax planning is a strategy designed to help you minimize your tax liability with various tax benefits and timing your revenue and expenses when applicable.
Reducing Your Adjusted Gross Income
One of the main goals of tax planning is to reduce your AGI. You can adjust your AGI on your personal tax return or reduce your business's income. Reducing income on your personal tax return includes finding eligible deductions and credits such as retirement plan contributions, mortgage interest, or student loan interest. Reducing your business's income includes various expense deductions, employee credits, and more.
Should you change your Tax Status?
There are several options for structuring your business, such as a sole proprietorship, general partnership, limited liability company, C-Corporation, or S-Corporation. The type of structure you choose determines how your business gets taxed. If you've outgrown your current structure, you might consider changing your status to help with taxes.
Pass-Through Entities & Corporations
Sole proprietorships, partnerships, and LLCs are pass-through businesses. That means the company's income passes through the business to the business owner, who then report the income on their individual tax returns. Corporations are taxed at the business level, and then each owner includes their income from the business on their personal tax returns.
The Tax Cuts and Jobs Act of 2017 lowered the corporate income tax rate from 35% to 21%. Meanwhile, the highest tax bracket for personal income is 37%. Depending on your total reported income, changing your structure could result in significant tax savings for the highest earners. But it's important to consult a tax professional and ensure the change is right for your business.
What Tax Deductions are available for Small Business?
Many tax deductions are available for different business expenses or types of business. Some deductions are industry-specific or only apply to companies of a certain size. A tax deduction reduces your reportable income, resulting in a lower tax bill. Here are some examples of deductions you may be able to claim.
Qualified Business Income Deduction
The Qualified Business Income Deduction allows business owners who report business income on personal tax returns to deduct up to 20%. Most small business owners for pass-through entities can claim this deduction. However, the QBI deduction has limitations depending on your total reported income and the type of business income.
Expense Deductions
The US Tax Code includes deductions to incentivize companies to participate in various economic activities. Examples of expenses that can be deducted include marketing or promotional activities to expand your reach and customer base, insurance that protects against hardships or liabilities that occur in the regular course of business, legitimate business travel or business meals, and paying for employee education.
Home Office Deduction
Business owners operating out of their residency may qualify for a home office deduction. You can take the simple deduction, allowing you to deduct $5 per square foot, or the actual expense method. This method requires calculating the percentage of your home's square footage used for the office and then deducting that percentage from your total home expenses.
Depreciation Expense
Many businesses require equipment to perform their essential duties and deliver goods or services. The IRS allows you to offset some of that cost with various equipment depreciation deductions. When it makes sense for your business, you may want to delay asset purchases until the end of the tax year to maximize your available deductions.
Business Vehicle Deductions
You may be able to deduct automobile costs if your business requires using a vehicle. The standard mileage rate and the actual expense method are the two main methods for calculating business vehicle expenses.
Financing Expense Deductions
Most businesses require financing help at some point, whether it's a small business loan, a business line of credit, or a business credit card. The IRS allows small business owners to deduct financing costs, such as loan interest and fees. There are some exceptions, such as not being able to deduct interest on loans with non-deductible interest.
Retirement Plan Deductions
Creating or contributing to a retirement plan can help reduce your AGI and tax liability. You can set up a 401 plan, pension plan, or IRA. Most retirement account contributions are taken from your pre-tax income. That means the larger the contribution, the lower your taxable income.
What Tax Credits are available for Small Business?
Tax credits reduce the taxes you owe or increase your refund. Here are some examples of business tax credits. The Work Opportunity Tax Credit helps incentivize employers to hire and retain employees from target groups. The Disabled Access Credit is worth 50% of eligible expenses up to the $10,000 limit. The Small Business Health Insurance Credit is available to businesses that pay employees' health insurance premiums.
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