As your small business expands, so can its tax bill. State, federal, and self-employment taxes can add up quickly. Profitable businesses need tax planning. Learn how to decrease your small company taxes this year.
As your small business income grows, it can be surprising how large your tax liabilities can become each year. From state and federal income taxes to self-employment taxes, your tax bills can be painfully high. Tax planning is an essential component of running a profitable business. Continue reading to learn how you can reduce your small business taxes this year.
The greater your company's revenue, the more valuable proactive tax planning can be. Most small businesses will need to employ several of the tax-planning strategies listed below.
Of course, lowering your AGI is the first step in business tax planning. We can't tell you how many times we've reviewed tax returns for high-income business owners who took almost no tax deductions from their earnings.
A lower AGI can help you stay in lower tax brackets, benefit from more tax credits, and avoid additional taxes like the Medicare surtax. Some ways to reduce your AGI may appear on your personal tax returns. Itemized deductions (such as mortgage interest, property taxes, and charitable contributions), individual contributions to retirement accounts, and even contributions to a Health Savings Account (HSA) are examples of this.
Recently, the cost of employment taxes has gone up because wages in the US have increased. Providing your staff with fringe benefits is one way to ease this financial burden on your company.
Wage increases result in higher employment tax expenses as well. Offering fringe benefits as part of employee compensation is one way to get around this. Some tax-free fringe benefits include medical insurance, group life insurance, help with child care, reimbursement for travel costs, employee meals, and even tuition reimbursement.
The largest pre-tax contributions can be made with the right retirement plan. Larger contributions result in larger tax deductions, which leads to a lower overall tax bill. Your business plan from years ago may not be optimized for where it is today. For example, a business owner with a seven-figure income can still make a $6,000 Traditional IRA contribution, which is better than nothing. By setting up a 401(k) plan and a Cash Balance Plan, she was able to make more contributions in 2021.
Even if you already have a 401(k) plan, you may benefit from changing it so that you can make the maximum contribution each year.
While a 401(k) plan is an important retirement-planning tool for many business owners, the Cash Balance Plan may make sense for those with a higher income. You should seriously 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. In the same way, not all business owners can or are willing to give several hundred thousand dollars each year, no matter how big the tax savings may be.
Certain tax deductions or credits may be unavailable in some years. If you are unable to use certain tax deductions in a given year, they may be carried forward for use in a subsequent year. The home office deduction, net operating losses (with some limitations), business credits, and even capital losses are examples of tax deductions that you may be able to carry forward.
If you have employees, you are almost certainly reimbursing them for some of their expenses. This could include anything from entertainment to travel. When you use an accountable plan, you can reimburse employees for business expenses without having to report them as employee income. More employee income means more payroll taxes to be paid.
If you live in Los Angeles, where traffic often makes traveling in your car time-consuming. Coupled with the fact that many people drive pricey luxury cars, a lot of business-owner clients might profit from writing off their actual auto expenses.
On the other hand, we are aware of people who live in other parts of the nation and 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.
If you have a good year, you may want to consider deferring some of your income to future years. This strategy will not completely eliminate taxes, but it will help you save money in the long run.
On the other hand, if you have a large taxable income for the year, you may want to prepay some expenses before the end of the year.
It takes a village to run a successful business. Are your spouse or children willing to pitch in? Putting them on the payroll for their work could result in tax savings. If you meet the IRS income tax thresholds, your children can work tax-free. Help them open a ROTH IRA with their income for extra credit.
As mentioned above, adding a spouse to your payroll could let you put twice as much into your retirement plan. Additionally, it might boost their potential Social Security benefits. The downside is that you will be responsible for paying payroll taxes on their income.
Using the right business entity (for your business) could help your company save a lot of money on taxes. Most typical business entities have advantages and disadvantages (Sole Proprietor, S-Corp, LLC, Partnership).
Consult your tax planning experts to ensure that you are using the appropriate business structure for your company.
Due to the COVID pandemic, many more people now work from home. If you are eligible for this tax break, you should take advantage of it.
Working with a financial planner who specializes in tax planning and a CPA (or other tax professional) can help you stay up to date on relevant tax law changes that may affect your business.
You don't have to become a tax expert, but if you read about new tax laws or major tax legislation, try to figure out how it might affect your taxes.
Tax planning is essential for business owners. Even if you enjoy staying up-to-date on tax laws and enjoy bookkeeping, you will still benefit from working with an expert in tax planning. Knowing tax law at a high level is very different from filing your business taxes. A mistake can result in astronomically high costs, including additional taxes and penalties.
Now is the time to take measures that could reduce the amount of business taxes you owe. These are just some of the many opportunities that may present themselves to you right now to help you improve your business's financial health before the end of the year.
Talk things over with your tax advisor to come up with a strategy that will benefit you the most.0
Being audited is comparable to being struck by lightning. You don't want to practice pole vaulting in a thunderstorm just because it's unlikely. Making sure your books are accurate and your taxes are filed on time is one of the best ways to keep your head down during tax season. Check out Vincere's take on tax season!
This post is just for informational purposes and is not meant to be legal, business, or tax advice. Regarding the matters discussed in this post, each individual should consult his or her own attorney, business advisor, or tax advisor. Vincere accepts no responsibility for actions taken in reliance on the information contained in this document.
For business tax planning articles, our tax resources provides valuable insights into how you can reduce your tax liability now, and in the future.
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