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As your income from your small business grows, it can be shocking how big your tax liabilities can become each year. From state and federal income taxes to self-employment taxes, your tax bills can be painfully large. Tax planning is a vital part of running a successful business. Keep reading for ways to reduce your small business tax each year.
The higher your business income, the more important tax planning can be. Most small businesses should use a number of tax-planning strategies.
Tax planning strategies to reduce your 2022 small business taxes
1. Find ways to reduce your adjusted gross income
I’m stating the obvious here, but the first step in tax planning for your business is to find ways to reduce your adjusted gross income (AGI). I can’t tell you how many times I’ve reviewed tax returns for high-income business owners who didn’t take any tax deductions based on their income.
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A lower AGI can keep your income in lower tax brackets; It may help you take advantage of additional tax credits or avoid additional taxes, such as the Medicare surtax.
Some ways to lower your AGI may fall on your personal tax return. This includes things like itemized deductions (mortgage deductions, property taxes, and charitable donations), individual contributions to retirement accounts, and Health Savings Account (HSA) contributions.
2. Use the fridge benefits for employees
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We’ve recently seen workers’ wages freeze in the US, resulting in higher employment tax costs. One way to help reduce this strain on your business budget is to use perks for your employees.
When you raise workers’ wages, you trigger higher employment tax costs. One way to get around that is to offer benefits as part of workers’ compensation.
Some tax-free benefits you may want to consider include medical insurance, group life insurance, childcare assistance, transportation allowance, employee meals or even tuition reimbursement.
Tax planning can help you save more money for retirement, which will help you live a happier and wealthier life … [+]
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3. Improve your retirement plan
Using the right retirement plan allows for maximum pre-tax contributions. Bigger contributions mean bigger tax deductions, which lowers the overall tax bill.
The plan you put together years ago may not be where your business is today. I spoke with a business owner who still has a seven-figure income using a traditional IRA. The $6,000 donation was better than nothing, but not by much. By setting up a 401(k) plan and cash balance plan, her contribution for 2021 was over $600,000.
Even if you have an existing 401(k) plan, you may benefit from upgrading the plan to make sure you can contribute the most each year.
4. Add a cash balance plan to the mix
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While a 401(k) plan is an important retirement-planning tool for many business owners, a cash balance plan can make sense for high-income business owners.
If you’re 50 or older and earn $500,000 or more, you should seriously talk to your trusted tax planning financial planner and CPA about setting up a Cash Balance Pension Plan.
Annuities are complicated to set up and run, and not all financial advisors are willing or able to set them up. Likewise, not all business owners are able or willing to contribute several hundred thousand dollars a year, no matter how significant the tax savings are.
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5. Don’t ignore carrier deductions
Some years you may not be able to take advantage of certain tax deductions or credits. If you cannot use certain tax deductions in a certain year, they can be carried over to be used in the next year.
Some examples of tax deductions you can claim are home office deductions, net operating losses (with certain limits), business credits and even capital losses.
6. Use accountability plans
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If you have employees, you can pay them for some expenses. This can include things like entertainment or even travel. Using a liability plan allows you to reimburse employees for business expenses without reporting them as employee income. More employee income means more payroll taxes you have to pay.
You don’t need to drive a Rolls Royce to a private jet to benefit from the automobile tax … [+]
7. Maximize your car tax deductions
I’m a financial advisor in Los Angeles, traffic makes driving any distance time consuming. Combine that with the fact that many people own expensive luxury cars, and many business-owner customers can benefit from reducing their actual car expenses.
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On the flip side, I know people who live in other parts of the country and drive 100+ miles every day. In the year In 2022, you may benefit from the IRS mileage allowance of 62.5 cents per mile.
9. Postponement of taxable income to future years
If you have a record year, you may want to try to roll over some of your income to future years. This strategy won’t completely eliminate taxes, but it will help save some money here and there.
On the flip side, assuming you have a big taxable income year, you may want to prepay some expenses before the year.
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Hiring a family member to work in your business can have tax benefits.
10. Recruit your family to work in the business
It takes a village to run a successful business. Do your spouse or children help in any way? Keeping a payroll for their work helps to save on taxes.
Children can work tax-free, assuming they follow the IRS income tax limits. For extra credit, help them open a ROTH IRA with their income.
Adding your spouse to your payroll can double your retirement plan contributions mentioned above. Likewise, it helps increase future Social Security benefits. The downside is that you owe payroll taxes on their income.
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11. Are you using the right business?
Using the right business entity (specific to your business) can greatly improve the tax efficiency of your business. Most common business entities have advantages and disadvantages (sole proprietor, S-corp, LLC, partnership). Talk to tax planning professionals to make sure you’re using the proper business structure for your business.
Are you working from home? You may qualify for the home office deduction.
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12. Are you eligible for the home office deduction?
The covid pandemic has caused many more people to work from home. If you qualify for this tax deduction, you should take it.
More about Home Office cuts
13. Stay current on small business tax law changes
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Working with a financial planner and CPA (or other tax professional) who specializes in tax planning can help you stay on top of relevant tax law changes that may affect your business.
You don’t have to be a tax expert, but if you hear some headlines about new tax laws or major tax laws, try and see how they affect your taxes.
14. Consult a tax planner
Tax planning isn’t something you do once a year when you file your taxes. By the time tax season rolls around, it’s too late to use most tax planning strategies.
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Tax planning is part of being a business owner. Even if you like to stay on top of current tax laws and enjoy accounting, you will still benefit from working with a professional tax planner.
Knowing tax law at a high level and filing business taxes are very different things. The cost of a mistake can be astronomically high, with both additional taxes and penalties.
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