Tax Planning for Small Businesses

Tax Planning for Small Businesses

As a small business owner, you know how important financial planning is to keep your business on track to be profitable and to experience stable growth. As the end of the year approaches, many business owners also consider how to reduce their tax burden. Tax planning is an important component of financial planning.

Whether you are just starting up your small business or doing a year-end evaluation, it is important to consider the right business structure, tax deductions, tax credits, retirement plan contributions, income and expenses, and how they might impact your business taxes. Having the best tax planning strategies can mean the difference between business growth and failure.

Consider Your Business Structure

How you choose to structure your business will impact your taxes. You may choose to operate as a sole proprietor, partnership, limited liability company (LLC), S corporation, or C corporation.

Business structures and how they might impact tax liability:

  • Sole proprietorships: Owned and operated by one person, business taxes are included on the owner’s individual tax return. Sole proprietors are eligible to deduct some home, office, and personal vehicle expenses. They can open a SEP (Simplified Employer Pension) retirement plan.
  • Partnerships: Businesses with two or more owners have many of the same benefits as sole proprietors.
  • S-corps: S-corps have less than 100 shareholders (must be U.S. citizens), and the business cannot be publicly traded on the stock exchange. Each shareholder’s personal income tax rate, ranging from 10% to 37%, determines their taxation. Distributions are exempt from double taxation, and owners can contribute to retirement accounts to reduce taxable income.
  • C-corps: This structure allows for an unlimited number of shareholders, regardless of their U.S. citizenship, as well as public trading on the stock exchange. Very large businesses typically use a C-corp structure.

Businesses structured as sole proprietorships, partnerships, LLCs, and S corporations, also known as pass-through businesses, do not pay corporate income tax. Instead, taxes are “passed through” to the individual’s tax return.

Maximize Tax Deductions

Talk with your financial advisor or tax professional about any tax deductions you are eligible for based on your business structure, location, and offerings.

Small business owners who work from home may be eligible for a home office deduction. To qualify, your home office must be your principal place of business, and you must use the space regularly and exclusively for business activities.

Other potential deductions include the following:

  • Business and office supplies
  • Software expenses
  • Depreciation of equipment and machinery
  • Utilities, phone, and internet
  • Vehicle expenses
  • Professional services and fees
  • Memberships and training
  • Educational expenses

Pass-through business owners may qualify for the qualified business income (QBI) deduction worth up to 20% of their share of the business’s income, as long as they meet specific income and service requirements.

Check Tax Credit Qualifications

The Internal Revenue Service’s list of credits and deductions for businesses includes the following tax credits:

  • Work Opportunity Tax Credit: A credit for hiring individuals from certain targeted groups who have traditionally faced employment barriers.
  • Disabled Access Credit: A credit to help offset the costs associated with providing necessary accommodations for people with disabilities.
  • Employee Retention Credit (ERC): A refundable tax credit for businesses and tax-exempt organizations whose employees were impacted by the COVID-19 pandemic.
  • Clean Energy Credits: Clean vehicles, energy-efficient buildings, and building energy-efficient homes can all qualify for credits.

Contribute to Retirement Accounts

Business owners can contribute to retirement accounts to reduce their taxable income.

Contribute to your 401(k) plan before the end of the tax year, and deduct your contribution from your taxable income. A solo 401(k) is an option for a single business owner with no employees. As your business expands, you can convert your solo 401(k) to a traditional 401(k).

Self-employed individuals may contribute up to $23,000 as an employee and up to 25% of their compensation or $46,000 per year (whichever is lower) as an employer. Employer and employee contributions have a total contribution limit of $69,000, or $76,500 for people aged 50 and older.

A simplified employee pension individual retirement account, or SEP IRA, is another option if you are self-employed with few or no employees. As the number of employees increases, a SEP IRA becomes less attractive.

A small business owner may contribute up to $69,000, or 25% of their income, to a SEP IRA, whichever is less.

Defer or Accelerate Your Income

Business owners have the option of using an accrual-based accounting system, which records transactions as they occur, or a cash-based accounting system, which records transactions when cash changes hands.

Using a cash-based accounting system, business owners can defer income by sending their invoices after January 1. Likewise, if a business owner believes their tax bracket will be higher in the coming year, they may invoice more quickly.

Small business owners have many available options to reduce their tax burden, including investing strategically. There is no one-size-fits-all guide to investment. Working with a wealth manager who uses a fee-only financial planning structure can ensure you make the best financial decisions for yourself and your loved ones.

Gabriel Katzner

In 2002, Gabriel Katzner, received his Juris Doctorate with honors from the Fordham University School of Law. After spending the first 7 years of his legal career practicing at Cahill Gordon & Reindel LLP, an international law firm based in New York, he went on to found his own firm.
Building on his legal background, Gabriel’s vision emerged during his tenure at Katzner Law Group, where he excelled in estate planning, forming deep client connections. Recognizing the fleeting nature of traditional estate planning and the lack of comprehensive financial guidance, Gabriel conceived Frame Wealth Management. His commitment to lifelong client partnerships drove him to earn credentials as a CERTIFIED FINANCIAL PLANNER™ and CPWA® professional.

Frame Wealth Management, Gabriel Katzner

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