5 Small Business Tax Planning Strategies
So, you owe a bit of taxes: now what? Being a small business owner provides many great benefits, from setting your own schedule to creating generational wealth. However, tax time is one of the seasons most small business owners dread.
There are legal ways to reduce your tax burden that many small business owners overlook. This is where tax planning comes in, allowing you to maximize your tax savings. Here are five small business tax planning strategies to leverage in the next filing season.
#1: Special Depreciation Deductions
Running a business is expensive, especially when equipment can become obsolete within a few years. If you find yourself purchasing assets above $2,500, you may be able to utilize special depreciation deductions on your tax return.
Generally, assets are depreciated over their useful lives, ranging from 3 years for software to 39 years for buildings. By claiming special depreciation deductions, you are able to immediately expense the entire cost of the asset. The asset must be placed in service before year-end to qualify.
There are two types of special depreciation deductions: Section 179 and Bonus. S179 is available on the federal return and in most states and can be claimed only when there is business income. Bonus depreciation is also a federal deduction, which some states conform to, and can be claimed regardless of if there is income.
There are limitations on the assets that can use special depreciation, such as limits for vehicles and leasehold improvements. This makes it important to reach out to a qualified accountant that can help you navigate through the specific regulations.
#2: Home Office Deduction
Small business owners that report income or loss on Schedule C can utilize the home office deduction. This is a reduction of taxable income for working out of a dedicated space in your home. To qualify for the deduction, the space must be used exclusively for business use, meaning working out of your kitchen won’t qualify.
If you do have a dedicated office space, you can write off a percentage of your mortgage or rent payments, utilities, insurance, repairs, and taxes. In addition, you can depreciate a portion of your home if you are the sole owner.
You can either claim the home office deduction based on actual expenses like those listed above, or you can take a flat amount per square foot. Like special depreciation options, there are limitations on the amounts you can claim.
#3: Business Travel
Do you frequently travel to and from client locations? How about venturing out of state for seminars and meetings? If so, you want to be sure you are maximizing your business travel deduction. The IRS allows you to write off any travel that is for business purposes. This could be going to Florida for a seminar or driving to a client location out of town. Travel expenses include airfare, lodging, rental cars, cleaning expenses, and per diem meals.
However, even if you don’t travel out of state, you can still leverage your business miles. The IRS has provisions in place that give you the opportunity to deduct business mileage. This rate changes each year based on inflation and other costs. In addition to mileage, you can depreciate your vehicle, even if it is only partially used for business purposes.
Other expenses, like gas, repairs, and maintenance, can be deducted from your tax return, resulting in more savings. Be sure you keep a travel log if you do plan on deducting mileage expenses. There are countless apps that can do this for you, or you can write out a simple list. If you do get audited by the IRS, they will most likely check your travel expenses.
#4: Account Method Changes
Changing accounting methods is another tax planning strategy that you might benefit from using. There are two primary accounting methods: cash and accrual. Cash accounting only records transactions when cash is received or paid, while accrual accounting operates based on when contractual obligations are satisfied.
If you have a large amount of receivables outstanding at year-end, you might benefit from utilizing the cash basis of accounting. Keep in mind that Schedule C taxpayers are required to report on the cash basis of accounting, so this might not be a viable strategy for your business.
Furthermore, once you elect one method, you do need to wait a certain time frame before you can switch back. Accounting method changes don’t eliminate the tax burden, but instead, defer it to a future period.
#5: Retirement Plans
Another tax planning strategy that gets overlooked is retirement plans. You don’t need employees to offer a retirement plan. In fact, you can take advantage of multiple different retirement plans outside of the traditional 401(k). Not only do retirement plan contributions generally lead to a deduction, but you can also save for your future and leverage tax credits, like the Saver’s Credit.
Additionally, there are credits available to small business owners that offer retirement plans for their employees. The IRS offers a retirement plan startup credit for small businesses that add a plan. This credit equals $500 for the following three years after the plan’s inception.
Retirement plans do need to follow specific provisions, such as mandatory employer matches and audits. This is why it’s important to work with an expert when you are considering offering a retirement plan benefit. You don’t want to be hit with unexpected annual costs.
Summary
Which of these tax planning opportunities can you implement? Tax planning is only effective if the strategies are implemented before year-end. This means that now is the time to start thinking about your tax liability for the next year.
To go over your specific situation and which strategies are right for you, reach out to one of our team members at Bookkeepme today. We can create a personalized tax plan, allowing you to maximize your tax savings and avoid being hit with an unexpected tax bill. Reach out today to learn more.
