November 21, 2019 | Last Updated on: August 16, 2023
It’s said that there are only two things that are certain in life: death and taxes. For small business owners, having to pay taxes is a certainty that you can’t avoid. For full-time tax professionals, small business tax laws are a piece of cake. For the rest of us, however, they can be very confusing. IRS business income tax guides are often full of accounting jargon and are hard to interpret. What are self-employment taxes and excise taxes? How do I optimize my income tax rate? How do I optimally dispense useless real estate to optimize property taxes? Small business owners need to spend their time on a variety of other types of business operations outside of accounting, and every extra hour spent figuring out their tax bill is lost time. For small business owners, the name of the tax game is savings. You want as much of your business income as possible to be saved as retained earnings through optimized business tax deductions. Every dollar sent to the IRS in tax payments can’t be reinvested into growing your business. Optimizing your state and federal income taxes will create extra opportunities for you no matter the type of business being run. We’ve put together our top ten best year-end tax-saving strategies for self-employed small business owners looking to save big bucks on their business and personal tax returns.
If you want to make sure that you’re saving as much as you can on tax payments, you need to do your due diligence. Do an audit of your business expenses, business structure, and related tax law, and relevant state and federal tax law. Looking through your tax returns from the last year of business can help you determine where you might find the most savings. You should consider hiring tax preparation services as your business grows and the accounting becomes too much for you and your business to handle. A qualified tax professional can determine exactly how much more you can save and can help with year-round tax planning.
Tax law changes all the time. Lots of these changes can often represent tax savings opportunities if you know your stuff and act on the changes in a timely manner. Whether it be new tax credits, structural changes to business entities, or broad-based tax cuts, federal and state taxes might be changing in your favor without you even knowing. For example, the Tax Cuts and Jobs Act of 2017 put in place a tax credit for employers that provide paid family and medical leave to employees. Most SMB business owners don’t take advantage of changes because they simply don’t have the time to keep up. It’s not enough to just update once a year as tax season comes up. You have to keep up year-round, and this is where a tax professional can help out. Keep on the lookout for opportunities to leverage new tax law into tax savings.
An accountable plan can help you save a ton if your employees are reimbursed for relevant business expenses like vehicle expenses, food and lodging, and other incidentals while they’re on the job. Accountable plans let you reimburse employees without counting the reimbursements as additional income. Reimbursements don’t show up on an employee’s W2 tax form, and thus you save on payroll taxes like FICA and unemployment taxes. IRS publication 463 has more information on accountable plans.
If you give out end of year raises, you’ll end up paying more on the employer’s share of an employee’s FICA, medicare taxes, and any relevant unemployment taxes. Instead of adding to an employee’s income tax, you can give out extra benefits like medical insurance to avoid extra taxation.
If you run a profit, that profit can be sheltered from your income taxes by putting them into a qualified retirement plan like an IRA or a 401(k). Good retirement plans will allow you to make tax deductions on contributions which reduces your taxable income. You can also set-up employee retirement plans, if you haven’t already, which can add to the savings. IRS publication 560 has more information on qualified retirement plan options.
Most business owners don’t change the structure of their business when they should. When you start small, it’s not something you think about. Sole proprietorship, limited liability companies (LLCs), and S corporations are fine. But once you’ve grown, it becomes a tax liability to not restructure your business. Restructuring as a C corporation can save you tons of money on the first $50,000 of income, for example, by lowering the corporate tax rate from 35% to 15%. Depending on your business type, there can be many options available. Talk with a tax professional about your options and make sure that your business structure isn’t holding your tax savings strategy back.
You should make sure that you’re taking into account any and all deductions that could be relevant to your taxes. For example, if you work out of your home you should take advantage of home office deductions. Additionally, while many deductions and tax credits have limitations for each tax year, that doesn’t mean you can’t carry them over to future years. Diligent record-keeping will help you to keep track of these carryovers you can see substantial tax savings.
Keep an eye on your personal income. Lots of tax breaks and additional taxes are based upon your adjusted gross income (AGI). For example: If you keep your AGI under $200,000 (or $250,00 if you’re married or file jointly) on your income tax return, you can save on 0.9% in additional medicare taxes. That can be a sizable tax payment saving.
At the end of the year, you can send out invoices a few days late so that the income from those invoices doesn’t have to be reported for the current tax year. Additionally, you can pay any bills that you’ll owe in January in December to take advantage of extra deductions for business expenses in the current year.
If you abandon a property that has no value to your business, you may be able to treat it as an ordinary loss on your schedule c, which is entirely deductible on your business tax returns. A sale of the property would, instead, add to your business’s taxable income.
