Smart business tax planning can make a big difference for your company. Each of the more than 30 million small businesses in the U.S. probably has a different ideal tax planning strategy. However, there are some generally applicable approaches. Many or even most small businesses could use one or more of these to save on income taxes. If you’re a business owner looking to minimize the impact of taxes, following certain strategies can really pay off.
Do you have business financial planning questions? Speak with a financial advisor today.
1. Manage the Timing of Your Income and Expenses
One basic technique is to accelerate expenses and defer income. Business can slow income by delaying sending invoices from the fourth quarter to the first quarter. To capture expenses, they can make large purchases before year-end rather than in a few months.
The benefit is that when income is deferred to next year, taxes on that income aren’t paid until next year. Similarly, an expense taken now can be a deduction against current income instead of future income.
Ideal timing of income and expenses depends on your business’s future outlook. If you expect significantly higher personal income next year, it may save on taxes to get income now, for instance. Make these decisions with your accountant and tax advisor.
2. Make the Most of Depreciation
Depreciation is an accounting technique that lets businesses record an asset’s loss in value as an expense. This paper expense can help reduce taxable income and, therefore, taxes. Usually depreciation must be spread over years or even decades. However, federal laws allow businesses to depreciate 100% of qualified property (up to $1 million) the year it was acquired. This is true only for property that was put into service after Sep. 27, 2017 and before 2023. For property put into service in 2023 and beyond, the deduction drops to 80% of qualified property.
This first-year bonus depreciation means a business can deduct from income the entire purchase price of some types of property. Business owners need to consult a tax advisor to be sure. But computers, software, equipment, machinery, furniture, vehicles and building improvements may qualify.
3. Use the Qualified Business Income Deduction
The same law as the one above also enables a brand-new strategy that lets some businesses deduct 20% of business income. This is only available to pass-through businesses such as sole proprietorships, single-member LLCs and S corporations.
C corporations, such as Amazon and General Electric, can’t get the qualified business income deduction. They are not flow-through entities for tax purposes. A C corporation can undergo a change to an S corporation by filing IRS Form 2553. However, S corporations have restrictions on the number and type of shareholders, as well as on the type of shares they can issue. These restrictions may limit S corporation growth prospects.
There are also limits to the qualified business income deduction based on income level and business type. For instance, many service companies will not qualify based on business type. So, again, talk to your tax advisor. The qualified business income deduction will likely expire in 2025.
4. Fund Retirement Plans
Retirement plans offer tax savings for businesses just as they do for individuals. If you have no retirement plan, consider setting one up. Owners of corporations can contribute up to 25% of their salary to a tax-deferred plan like a 401(k). Sole proprietors can put up to 20% of earnings into a tax-deferred SEP-IRA account.
To get serious tax savings, consider a defined benefit plan. This is essentially a pension plan. They can let businesses put away far more in tax-deferred contributions than defined contribution plans such as IRAs and 401(k)s. The catch is that defined benefit plans are as complicated as IRAs are easy. Expert assistance is essential to set one up. And they aren’t right for all businesses.
5. Offer Employee Benefits
Employee benefits such as company-sponsored health insurance can help attract and retain talent. They can also give your business a deduction to reduce taxable income. And unlike wage hikes, adding or improving employee benefits doesn’t increase employment tax costs.
Health insurance isn’t the only option. Company contributions to benefits such as life, disability and long-term care insurance can also reduce taxable income. So can tuition assistance, childcare assistance, transportation benefits and company cafeterias.
6. Leverage Health Savings Accounts
If your health insurance plan has a high deductible, you may be able to fund a health savings account (HSA). This is one of the most tax-advantaged ways to save. Contributions to HSAs can be deducted from current income. The contributions to the account grow tax-free. And withdrawals for qualified health expenses are also tax-free.
7. Consider Relocation
Some jurisdictions have significantly lower business taxes than others. Relocating to a state or city with lower taxes can reduce the business’s tax burden.
For instance, Wyoming and South Dakota have no individual or corporate income tax. Alaska has no state sales tax or individual income tax. Montana, New Hampshire and Oregon have no sales tax. Other states that have a business-friendly tax regime are Tennessee, Texas, Nevada and Washington.
These are just a few of the more widely useful business tax planning strategies. Businesses may also be able to save on taxes by employing family members or setting up a home office. Changing your tax filing status from C corporation to S corporation can avoid double taxation. That can also possibly open the way to a qualified business income deduction.
Small Business Tips
- A financial advisor can offer specific advice for your business’ situation. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- The complexity of business taxation means almost any business would do well to consider seeking expert advice. A tax accountant may charge several hundred dollars an hour for customized planning. However, a much less expensive, off-the-shelf tax return preparation software can run what-if scenarios for business owners interested in do-it-yourself tax planning.
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