Your tax strategy shouldn't start at year-end, having good books will help you make smart tax decisions early on and help you save money on your tax bill. Keeping good records will allow you to monitor your company’s progress, make plans for the future, and prepare for the tax return season.
Taxes can be a stressful and daunting job to face by yourself. When you file your federal income tax bill, you'll want to look for ways to get the most out of your revenue and minimize your tax liability to ensure you get to walk away with more money in your pockets.
The good news is that there are small business tax-saving tactics you can consider to ensure you’re getting the most out of your taxable income this year. Tax strategies for business owners ensure you get the lowest possible tax rate and can claim all of the tax credits and deductions your small business qualifies to receive.
Whether you're doing your taxes yourself or working with a tax advisor, here are some tax strategies for business owners you'll want to consider.
1. Change your Business Structure
When you first start your small business, you have a few different options for how you want to structure your business. You can do an LLC, partnership, sole proprietor, S corporation, or a C corporation. How you structure your business impacts your taxes and how you're taxed every year.
Even though it made sense to start your business as an LLC, it may not make sense today if your income has grown significantly. Staying in the same business structure and not adapting to growth can raise your tax bill significantly.
Let's break it down: With an LLC your business's income passes through to the owner's tax return. So, you don't have to pay corporate income tax. The current corporate tax rate is 21%, but the highest tax bracket for LLCs is 37%. So, if you currently have an LLC and you’re in the highest tax bracket, it may make sense to change your business structure to help you save a significant amount of money during tax season.
Keep in mind: that taxes aren’t the only factor that plays a role in structuring your small business. Finding the right structure for both taxes and your company’s needs is a balancing act. If you’re interested in seeing if making a switch is the right choice for you, you’ll want to speak with your tax professional.
2. Start a Retirement Plan
Setting up a retirement plan for yourself or your employees can be a great way to reduce your overall taxable income.
As an owner of a small business, you no longer get the luxury of having a 401(k) matched by your employer. However, you can still maximize your retirement savings to enjoy the tax benefits. One way to do this is by participating in a one-participant 401(k) plan. 401K plan contributions aren’t immediately taxable so you maybe able to reduce your annual taxable income. In 2022 the 401k contribution limit is set at $20,500. Meaning you can reduce your taxable income by $20,500 for 2022.
If you have employees, then offering a 401(k) will allow you to receive significant tax breaks and deductions during tax season. Through the SECURE Act, your small business can increase your tax credits if you set up a first-time 401(k) plan. To qualify for this tax credit, you'll need to have the following:
- Haven't had an employer-sponsored retirement plan in the last three years.
- Have less than 100 employees who received at least $5,000 in compensation in a year
- Have at least one employee participating that isn't considered highly compensated.
If this sounds like you, you can claim all of the setup and administrative costs associated with starting a 401(k) plan for employees. You can receive this startup credit of up to $5,000 for the first three years.
Not only that but offering a 401k plan to your employees will help you retain top talent and keep your employees happy, which will help you save more money and improve your retention rate over time.
3. Save for Healthcare Expenses
An HSA is a Health Savings Account. It's a great option to offer employees in your benefits package that will keep you competitive, and it's also one of the best tax avoidance strategies.
For starters, contributions reduce your taxable income. This means you'll get a significant federal income tax deduction for all contributions added to your or your employees’ HSA accounts.
Providing an HSA account for your employees will help you lower your payroll taxes if you have your HSA set up to allow for pretax contributions. If your business is still running under an LLC, your contributions to your employee’s HSA plans will be tax-deductible as a business expense. So, they aren’t counted as employment income and aren’t subject to the payroll tax. All contributions made by the employer come from taxable income, so you won't need to itemize your deductions for your employees.
As a business owner, you’ll benefit from putting contributions into an HSA for yourself because the funds in your HSA will grow tax-free. Every qualified withdrawal you make to help you pay for medical expenses is also always tax-free.
Another reason an HSA plan is great is the unique rollover rules. You can choose how to invest this money, and if you don't use it that year, it can roll over to the next. Plus, offering an HSA can also increase employee satisfaction and help lower health costs for your employees.
Whether you're a self-employed LLC looking to save at tax season, or a small business that wants to offer it to your employees, an HSA plan has attractive tax-saving benefits both can benefit from.
4. Take Advantage of the QBI Deduction
QBI deduction stands for Qualified Business Income deduction. This deduction allows certain small business owners to deduct up to 20% of their qualified business income from their taxes. The IRS determines your eligibility based on your business structure and income for that year.
For a small business to qualify for a qualified business income deduction, they need a pass-through entity. Essentially, a pass-through entity refers to your small business income passing through to the business owner.
Eligible small businesses include:
- Sole proprietorships
- S corporations
C corporations don't qualify for this deduction, even if they have a pass-through entity.
5. Do your books and Track Your Growth
One of the biggest mistakes businesses make is failing to keep their books timely and not keeping all of their receipts from the year. By doing this, you’ll be able to see more opportunities for tax breaks early. Some small businesses grow faster than they intended, which means they could be growing out of their current business structure and missing out on potential deductions during tax season.
If you see a little extra income early on, you can reinvest your money to lower your taxable income. You can also decide whether to employ one of these strategies to reduce your bill. However, the only way you’ll ever know what you qualify for is if you’re keeping good records throughout the year.
Stay on top of your bookkeeping, track your growth, and always be one step ahead before tax season rolls around.
These are just to name a few small business tax-saving tactics you can consider. If you work with a tax advisor or bookkeeping professional, there are other ways you can reduce your amount of taxable income and avoid common tax planning mistakes.
As a business owner, you'll always be trying to fine-tune your tax strategy. This will help ensure you're getting the most out of your income, tax credits, and deductions every year. If you see any issues in your taxes early on, lean on Ledger Financial. We'll help you organize your books, plan effectively and can even help with filing your tax return.