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9 Tax Strategies For Small Business Owners

If you’re a small business owner you’ll know that maximizing savings can lead to a greater cash flow and tax strategies for small business owners is one very efficient manner that can assist with better cash flow. Implementing effective tax strategies for small business owners is a key method to achieve this.  This involves adjusting your tax strategy and evaluating the financial performance of your company to allow you to take advantage of the requirements that you may be eligible for.

tax strategies for small business owners

Ordinary Vs Necessary Deductions?

It’s important to remember that the expenses that you claim must be considered ordinary and necessary.

Ordinary deductions include expenses that are accepted in your business or are typical for businesses of the same nature. These expenses are usually acknowledged as a regular part of running your respective business.

While necessary deductions are expenses that are helpful and appropriate for your business. The expense may not be considered indispensable, but it should directly benefit your business.

Regardless of the size of your company, having a tax strategy for your business is something that can have a significant impact on your business with lucrative opportunities that exist to decrease your tax bill.

9 Tax Strategies For Small Business Owners

1. Maximize Deductions

This includes common items that are deductible expenses for small businesses which can include:

Office supplies: These can include furniture, pens, and even business cards provided they are used exclusively for business use.

Travel: If you use your vehicle for business purposes you can deduct auto-related expenses on your tax return. 

You may also claim expenses related to business travel e.g. you attend a professional education course and need to travel to where the course will be held. Expenses of this nature may include the purchase of your airplane ticket or bus ticket and even using services like Uber.

Advertising: This includes costs associated with getting the word out about your business, whether it’s poster, digital advertisement, and even the payment of a marketing services provider and business coach.

Memberships And Subscriptions: If you require a professional membership to perform your duties or if a subscription benefits the business then this may also be tax-deductible. An example of this is if you offer writing services and you subscribe to a newsletter or resource that has workshops or possible job opportunities.

Home Business Tax Deductions: This is one area that is often overlooked by small business owners, usually because there’s a lot of uncertainty surrounding what can be claimed under a ‘home office.’ However, home office tax deductions can save you a considerable amount of money on your tax return.

If you are using a home office then it must be your principal place of business i.e. you don’t have another office somewhere else. Additionally, the place that you consider your office must be used exclusively for business so let’s say for example you use a spare room as your office but it’s also used if you have guests at your home then it’s ineligible to claim this.

Utilities: This can include phone expenses, Internet services, and costs associated with gas, electricity, water, and trash.

If you claim regularly for gas, electricity, water, and trash as part of the home business deduction then you will only be able to claim for a part of these expenses as they are also used for personal use.

Phone Expenses: May only be claimed if they are essential to the successful running of your business. The primary phone for your home is not deductible; the charges for business long-distance phone calls are what constitute business deductible expenses.

Internet services: These services are 100% claimable at your dedicated office space or at a store. If you are claiming for this from your home (i.e. your primary place of business) you need to calculate the percentage used for your business.

2. Year-End Tax Planning

Year-end tax planning is especially crucial when tax filing approaches. There are various strategies that can be used to take advantage of available deductions and credits.

Strategies for year-end tax planning for small business owners includes leveraging tax credits, considering tax changes, maximizing deductions, contributing to retirement accounts, and managing income timing.

Step-by-step guide:

  1. Review financial statements.
  2. Identify deductions and credits.
  3. Contribute to retirement accounts.
  4. Adjust income timing strategically.

It’s also important to note that prepaying expenses are able to boost deductions, while delaying income into the next year defers tax liability, optimizing savings and financial planning.

tax strategies to help small business owners

3. Working With A Tax Accountant

Hiring a tax accountant offers you as a small business owner expert advice that ensures compliance with potentially complex tax laws, accurate tax return preparation, and possible cost savings through optimized deductions and credits. 

We have our fingers on the pulse for all small businesses but if you are looking for a tax accountant in New Jersey with in-depth knowledge about the legislation and requirements for compliance we’re a team based in New Jersey and are ready to assist you with a full suite of accounting, tax and CFO services for your small business.

4. Retirement Plans

Individual business owners benefit the most from an individual 401K plan, which can be set up through either a financial institution or brokerage firm. This allows you to contribute as both the employee and employer.

Simple Savings Incentive Match Plan: This is best for small business owners with fewer than 100 employees. To set this up you need to complete the IRS Form 5304-SIMPLE or 5305-SIMPLE form to set up the plan. You as the business owner and your employees can contribute to the plan.

Simplified Employee Pension: Works best for business owners that have few employees or are the only employee of the business, it’s easy to set up and maintain. You need to complete the IRS 5305-SEP form and set up separate SEP-IRA’s for yourself and employees, if applicable. Employees can make direct contributions into the IRA. As an employer you are able to contribute a maximum of up to 25% of an employee’s compensation.

5. Business Tax Credits

There are several different credits that small business owners are able to benefit from which include:

Employee Retention Credit (ERC): This is available to businesses that retain employees during challenging times. One example of this is the COVID-19 pandemic. Eligibility for this credit involves meeting specific criteria that are related to revenue decline or government-mandated shutdowns.

Work Opportunity Tax Credit (WOTC): This offers a tax credit for hiring individuals from designated target groups, which can include veterans, ex-felons, and individuals who receive certain government assistance. Eligibility requires hiring from these designated groups as well as meeting specific criteria.

Research and Development (R&D) Credit: This encourages innovation by offering a credit for businesses that invest in qualified research activities. To ascertain eligibility you need to look at expenses related to improving products, processes, or software development.

To determine eligibility and claim these credits, small business owners should review IRS guidelines and eligibility criteria for each credit or consult with a tax professional about tax strategies for small business owners is one of the best things to do. 

6. Car Expenses

If you use a car for business purposes, you can usually deduct all car related expenses including depreciation. However, you must have records that prove business usage, as well as keep track of your miles. 

You can either deduct actual expenses or in absence of proper record keeping you can rely on the IRS standard mileage rate: For the first half of 2022, this rate was 58.5 cents per mile; from July 1 through December 31, 2022, the rate was increased to 62.5 cents per mile. 

This rate goes up to 65.5 cents per mile in 2023. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage.

small business tax strategies

7. Startup And Organizational Costs

Small business owners may take a startup cost deduction of up to $5,000 for the first year the remaining will be amortized over 15 years.  Please refer to IRS publication 535 for more details.

8. Employee Benefits Programs

You can also deduct certain employee benefit programs, like education assistance, dependent care assistance, life insurance adoption assistance or qualified retirement plan accounts. For self-employed individuals, contributions to their own retirement plans are personal deductions claimed on Form 1040.

9. Contracted Labor

Do you use independent contractors or freelancers as a part of your labor force? The cost of hiring contracted labor is fully tax deductible. Note that you must issue form MISC-1099 to any contract worker receiving $600 or more from you in a given tax year.

If the employee is being paid via credit card or PayPal, the payment processor must issue the worker form 1099-K. A common question we received from your client is whether they can hire a family member as a freelancer for their project. 

The answer is yes, there is no restriction hiring family members as a freelancer. However, if the family member ends up working full time or substantial hours for a long term you may have to classify them as an employee.

While it may be a daunting task thinking about implementing these strategies for your business, why not get in touch with us for all your accounting and tax services. We are able to provide you with a full suite of accounting, tax and CFO services that will be sure to align with your business needs.

FAQs

How can I ensure I'm claiming all the deductions I'm entitled to?

Start by making sure that you keep accurate records that are IRS compliant and make sure to keep updated with tax laws that could impact your business.  If you’re unsure, seek professional advice sooner rather than later.

What home office expenses can I deduct?

Download our free PDF guide for Home Business Tax Deductions.

When should I start planning for year-end taxes?

Ideally you should always ensure that your business is in a state of tax readiness. This means always staying up to date with tax laws, relevant to your business and in general. Regular bookkeeping and estimated tax payments on a quarterly basis are a good place to start.

If this appears overwhelming then look for outsourced accounting services that can help you get on track.

How can a local tax accountant, skilled in tax strategies for small business owners, help my business?

A local tax accountant understands all the local laws and has the technical expertise and knowledge to accurately assist with tax saving strategies for small business, and give business advice based on financial insights and also enable financial planning and strategy that can help you grow your business.

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