Small Business Tax Planning: The Do’s and Don’ts

A small business owner planning for tax season

As a small business owner, tax season is never fun. But with better tax planning, you can take advantage of deductions and credits that can help reduce your business’s tax burden.

These seven strategies discuss the do’s and don’ts of small business tax planning, so you can keep more of your profit in your pocket!

Struggling with taxes for your small business? Our experts at TaxRobot are here to help you get the tax credit refunds you didn’t know you qualified for — Get in touch today!

Related: What Is the Augusta Rule for Taxes?

  1. Should You Change Your Tax Status?

Owning a small business comes with various options for how you structure your company:

  • Sole proprietorship
  • Limited liability company (LLC)
  • S or C corporation
  • Partnership

The structure you choose will affect how you plan for, pay, and file your taxes.

Pass-through businesses (LLCs, S corps, partnerships, and sole proprietorships) do not have to pay corporate income tax, unlike C corporations.

However, income earned in a pass-through business gets taxes based on its income — up to 37% — whereas the highest corporate tax rate is 21%.

So if your business is taxed as a pass-through business and falls in the higher tax brackets, electing to get taxed as a C corporation can result in massive savings come tax time.

  1. Are You Missing Out on Deductions?

One option that many pass-through businesses have to decrease their tax burden is the qualified business income deduction, allowing business owners to deduct up to 20% of their income.

However, the qualified business income deduction comes with a few limitations.

For example, specified service trades or businesses cannot claim this deduction once their income hits a certain level — these are typically businesses that depend on reputation or skill, like medical practices and law firms.

The upper limits of that threshold change frequently ($170,050 as of the tax year 2022).

If your company is not a specified services trade or business and its income is above that limit, you can still claim this deduction; however, the amount is limited to ½ of W-2 wages paid or ¼ of those wages and 2.5% of qualified property.

  1. Do You Work From Home?

Many small business owners operate out of their homes — if you do, you don’t want to miss out on the home office deduction. This deduction is a crucial part of small business tax planning for anyone with a home office.

The home office deduction allows business owners to deduct expenses for using part of their house for business purposes.

The caveat? You must only use the space you claim for your business.

The simplified method of this deduction allows you to deduct $5 per sq. foot of the area you use for business — up to 300 sq. feet.

You can also use the expense method by taking that square footage and deducting the percentage it takes from your mortgage, property taxes, utilities, etc.

Related: Nine Tax Deductions for Sole Proprietorships

  1. Should You Defer or Accelerate Your Income?
 A man taking cash out of his wallet

If you use the cash accounting method (as most small businesses do), then you recognize your income as you receive it and your expenses as you pay them.

This method gives you some options for your tax planning strategy.

For example, if you expect to pay a higher tax rate next year, you might want to accelerate your income by billing clients or customers prior to the start of the new year.

On the other hand, you can hold off on that billing until January to pay fewer taxes on that invoice!

This strategy works with expenses, too! You can accelerate your expenses while you’re in a high tax bracket and expect to drop down, and vice versa.

  1. Can Retirement Accounts Reduce Your Taxes?

You have various options for saving for retirement — for you and your employees. Plus, contributing to a retirement savings account can significantly reduce your taxable income!

So if you set up a 401(k) before the end of the year, you can deduct the contributions you make when filing your tax return.

In addition to those deductions, you may also qualify for a retirement plan startup tax credit if you:

  • Had under 100 employees who got $5,000 or more in compensation
  • Had one or more plan participants who were not categorized as a highly-compensated employee
  • Have not had any employee-sponsored retirement savings plans during the last three years
  1. Do You Know Your Business’s Relevant Tax Deadlines?

We all know (and dread) tax day — April 15th, right? Well, there are some other important dates to remember for small business owners.

For example, let’s look at the significant tax deadlines for 2023:

  • January 17th: Time to pay your 4th quarter estimated taxes for 2022!
  • March 15th: S corporations and partnerships must submit their tax returns!
  • April 18th: Time for individuals and C corporations to submit their returns and pay 1st quarter estimated taxes!
  • June 15th: Time to send the IRS your 2nd quarter estimated taxes!
  • September 15th: Time for another estimated tax payment to the IRS!
  1. Are You Claiming Your Tax Credits?

Tax deductions can reduce your taxable income, but tax credits can reduce the total amount of tax you owe — something that’s invaluable for small businesses.

Unfortunately, many business owners miss out some exceptional tax credits because they don’t know they qualify!

Table of Contents

The WOTC Credit

The work opportunity tax credit helps employers hire and retain employees from groups that traditionally face barriers to employment — veterans, felons, etc.

If your small business hires someone that’s a member of one of these groups, you can reduce your taxes owed by up to $2,400 per hire using IRS Form 8850.

 A small business owner working on her taxes

Related: Best Tax Prep Services for 2023

The R&D Tax Credit

Another tax credit that many businesses don’t know they’re eligible for is the R&D tax credit, which is available to most companies that use the scientific process to develop or improve parts of their business or products.

If your business works on product development, software development, or otherwise devotes time to creating or improving new, innovative products, you can likely receive this credit and save thousands on taxes!

Knowing if you qualify for (and how much you qualify for) different tax credits can be confusing, but it doesn’t have to be — at TaxRobot, we combine the power of AI with our in-house tax credit experts to get you the biggest refund without spending all your time and money. Get the most out of your tax credits here!

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