9 Effective Tax Planning Tips for Small Businesses

Navigating the complexities of tax planning can be a daunting task for small business owners, so we’ve gathered insights from nine financial experts, including CPAs and CEOs, to offer strategies that can help minimize tax burdens legally. From the importance of tracking expenses and contributing to retirement to the savvy management of income and expenses timing, these seasoned professionals provide actionable advice to make tax season less taxing for entrepreneurs.

• Track Expenses and Contribute to Retirement
• Establish Retirement Plans for Tax Credits
• Maintain Accurate Business Expense Records
• Maximize Section 199A Deduction Benefits
• Adjust Projected Tax Payments Routinely
• Utilize Section 179 for Immediate Deductions
• Document Business-Related Expenses for Deductions
• Explore Deductions and Credits Thoroughly
• Manage Timing of Income and Expenses

Track Expenses and Contribute to Retirement

I would have two pieces of advice for small business owners: Firstly, keep track of all expenses. It is easy for a small business owner to be too busy running the business, and they may forget to keep track of all the little expenses that can add up and reduce the tax burden.

Secondly, contribute to retirement plans. Small business owners have several options for retirement plans, which can not only reduce their tax due by tens of thousands of dollars but also help them save for retirement. Employers often contribute to retirement plans for an employee, while small business owners are on their own when it comes to retirement planning.

Joshua Katz
Owner, Universal Tax Professionals

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Establish Retirement Plans for Tax Credits

There are now Retirement Plans Startup Costs Tax Credits. Eligible employers may be able to claim a tax credit of up to $5,000, for three years, for the ordinary and necessary costs of starting a plan. The tax credit can reduce the amount of taxes you owe on a dollar-for-dollar basis.

In addition, you can start saving for your own personal retirement. By maxing out your retirement contributions, you are building a solid financial foundation for your future. One of the biggest risks we are going to face is longevity risk—the risk of outliving our assets. With the advances in medicine and technology, people are living longer. One out of four 65-year-old men of average health will live to age 93. One out of four 65-year-old women will live to age 96. We need to plan for a longer retirement period. The more we save and the earlier we save, the better.

By contributing the maximum allowable amount to retirement accounts, you are consistently investing over time. Your money has more time to grow. In addition, you will benefit from compound interest. The longer your money remains invested and continues to compound, the greater your potential returns can be

Melissa Pavone
Director – Investments Cfp, Cdfa, Oppenheimer & Co. Inc.

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Maintain Accurate Business Expense Records

One straightforward tax-planning strategy is to keep meticulous records of all business expenses. Make sure every single business expense is accurately recorded and properly categorized. Perhaps you can double-check your records weekly or even daily to ensure nothing is missed. In case of an audit, you will have all the necessary records and evidence to prove that your expenses are legitimate.

Also, many of these expenses can be classified as tax-deductible, which can significantly reduce your taxable income and, ultimately, your overall tax burden. Invest in reliable and user-friendly accounting software or work with a professional accountant to ensure you are maximizing your tax deductions.

A professional can also provide a second sharp eye to your records and recommend any adjustments or corrections if needed. Investing in proper record-keeping and hiring a professional to assist may seem like extra expenses, but they can save you a considerable amount of money in the long run.

Sherman Standberry
CPA and Managing Partner, My CPA Coach

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Maximize Section 199A Deduction Benefits

The Section 199A deduction allows eligible small-business owners to deduct up to 20% of their qualified business income from their taxable income. This deduction can significantly reduce the tax burden for small-business owners operating as sole proprietors, partnerships, S corporations, and certain types of trusts and estates.

To take advantage of the Section 199A deduction, small-business owners should ensure they understand the eligibility requirements and carefully plan their business structure and income to maximize the deduction.

For example, let’s consider a small-business owner named Sarah who operates a consulting business as a sole proprietor. Sarah’s business generates $100,000 in qualified business income for the tax year. With the Section 199A deduction, Sarah can potentially deduct up to $20,000 (20% of $100,000) from her taxable income, resulting in substantial tax savings.

However, the eligibility and calculation of the Section 199A deduction can be complex, especially for businesses with certain types of income or in specific industries.

Limitations:

– Thresholds and Phase-In/Phase-Out Ranges:

The deduction phases in for taxable incomes above certain thresholds, which are adjusted annually for inflation. For 2023, these thresholds were $170,050 for single filers and $340,100 for married filing jointly.

– Specified Service Trade or Business (SSTB) Limitation:

SSTBs begin to phase out of the deduction eligibility above the threshold amounts, with complete ineligibility for single filers with income over $220,050 and married filing jointly over $440,100 for 2023.

– W-2 Wage and Capital Limitation:

Above the threshold amounts, the deduction may be limited based on the W-2 wages paid by the business and/or the unadjusted basis of qualified property. This ensures the deduction benefits businesses contributing to employment and tangible property investment.

– Rental Real Estate Activities:

Subject to a safe-harbor rule, requiring strict record-keeping and operational standards to qualify.

– Aggregation Rules:

Allows combining multiple businesses for calculating the deduction, subject to complex requirements.

– Loss Carryover:

Net business losses reduce QBI deductions in the following year.

– REIT Dividends and Publicly Traded Partnership Income:

Different calculation rules apply than for QBI from a business.

Zaher Dehni
CEO, Taxfully

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Adjust Projected Tax Payments Routinely

For small-business owners, maintaining efficient financial operations means keeping a close eye on and making necessary adjustments to projected tax payments. Entrepreneurs can avoid underpayment fines and improve cash-flow dynamics at the same time by routinely evaluating these payments. The key is that these estimates must be accurate in order to avoid overpaying, which wastes resources, and underpaying, which could result in fines and other financial hardships.

As a result, taking the initiative to adjust projected tax obligations in a timely manner guarantees compliance and creates an atmosphere that supports long-term expansion and stability in the business sector.

Brett Berger
Co-Founder & COO, Flow Sparrow

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Utilize Section 179 for Immediate Deductions

One tax-planning strategy I highly recommend to small business owners looking to minimize their tax burden legally is to make the most of tax deductions and credits available specifically for small businesses.

Among these, one often overlooked but highly effective tactic is the utilization of Section 179 of the IRS tax code. This section allows businesses to deduct the full purchase price of qualifying equipment or software purchased or financed during the tax year, up to a certain limit. This means instead of gradually deducting portions of the equipment’s cost through depreciation over several years, you can deduct the entire expense from your gross income in the year it was purchased, significantly reducing your taxable income.

For example, if your business purchases new computers, office furniture, or even software that’s integral to your operations, these can potentially qualify under Section 179. It’s essential, however, to ensure that these purchases meet the specific criteria set by the IRS, such as being used for business purposes more than 50% of the time.

To put this into perspective, let’s say your business bought equipment worth $50,000 in a single tax year. By taking full advantage of Section 179, you could deduct the entire amount from your gross income. If you’re in a 22% tax bracket, this could save you $11,000 in taxes for that year. This immediate expense deduction can significantly lower your tax bill, freeing up more capital for reinvestment in your business.

My advice to small business owners is to plan your capital expenditures with Section 179 in mind. Timing your purchases so you can take full advantage of this deduction in a particular tax year can be a smart move. However, it’s crucial to consult with a tax professional to ensure that your specific purchases qualify and to understand how the deduction will affect your overall tax situation. Planning and consultation are key to maximizing the benefits of tax strategies like Section 179, helping you keep more of your hard-earned money to grow and sustain your business.

Michael Dion
Chief Finance Nerd, F9 Finance

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Document Business-Related Expenses for Deductions

As a financial planner and tax expert, one effective strategy I highly recommend is to take advantage of deductions for business-related expenses. Make sure to keep documentation of expenses such as home-office costs, airfare related to business trips, and other legitimate business expenditures.

For example, if you use a portion of your home exclusively for business purposes, you can claim a deduction for your home-office space. Similarly, if you travel frequently for business meetings or conferences, keep track of your airfare, accommodation, and other related expenses. These can reduce your taxable income and lower your tax liability.

Just make sure to comply with tax regulations and keep detailed records of everything. This will allow small-business owners to legally minimize their tax burden while optimizing their financial position.

Joe Chappius
Financial Planner, Tax Climate

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Explore Deductions and Credits Thoroughly

One effective tax-planning strategy for small-business owners is to take full advantage of deductions and credits available to them. This includes deducting business expenses such as office supplies, equipment, software, and travel expenses that are necessary for running the business.

Small-business owners should also explore specific tax credits for which they may be eligible, such as those for research and development, energy-efficiency improvements, or for hiring certain categories of employees. Keeping thorough and organized records of all expenses and understanding the tax benefits for which your business qualifies can significantly reduce your tax burden legally.

Lori Shao
Founder & CEO, Finli

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Manage Timing of Income and Expenses

The best tip I can give to small business owners is that it’s all about timing. The specific #1 tip to minimize their tax burden legally is to manage the timing of income and expenses. If your business is doing well and you are busy all year, be proactive and plan ahead, well before the year is over.

This gives you time to make large purchases before year-end and deduct them against the business in that year, or defer income to the next. Have these conversations in advance of year-end, like in October, so you’re aware or can be ‘advised’ on what to do. Being a business owner myself, I like to have a rough idea of taxes or a snapshot of my tax exposure with real cash flows for accurate projections.

What if it’s much higher ‘on paper,’ but you didn’t realize it? Business owners have revenues that can be drastically different each year for many reasons. Be proactive in tax planning; I recommend it’s done well before the end of the year to calculate the maximum you can do.

Stephen Roth
Founder Principal, Limestone Financial Group

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