Posted by Elliot Kravitz, ATP

Tax Saving Strategies for Small Businesses

Tax Saving Strategies for Small Businesses

The Internal Revenue Code is configured to offer numerous tax reductions to individuals and businesses. Even the IRS recognizes that you have to save money to live and manage your business.

Certain tax-saving strategies for small businesses, such as temporary income and expenses, must be implemented by the end of the fiscal year. But others, such as funding a pension plan, can be done before filing the tax return.

Deduction Of Eligible Business Income

The TCJA created the Qualified Business Income (QBI) Deduction when the law came into effect in 2018. You can deduct 20% of qualifying business income if your business is a pass-through entity: an S corporation, a sole proprietorship, or a partnership, which transfers income and deductions to shareholders, partners, or owners to report their returns.

This deduction is in addition to the normal business expense deduction claims. You must be eligible if your taxable income is less than $157,500 or $ 315,000 if you are married and file a joint declaration. Special laws apply if you earn more than these amounts, so you may qualify, depending on your business's nature.

The QBI deduction has other restrictions and limitations; therefore, consult your tax preparer regarding your eligibility. 

Financing a Pension Plan

Establishing and funding a pension plan for you and your employees can save you serious money on taxes. Make sure it is a qualified plan so that you can take advantage of these tax savings. It must be recognized by the Internal Revenue Service to allow the deferral of income tax until the profit is withdrawn. These include IRAs and defined contribution plans, such as 401 (k) or 403 (b). 

There are many options available, depending on your business, goals, and needs. Consider talking to a financial professional to determine which one is best for you.

Get Tax Credits to Reduce Your Business's Income

Tax credits are how the federal government encourages or discourages businesses and individuals to do things or not do things that affect the greater good. For example, you can get tax credits for going green, hiring employees, providing access to employees with disabilities and the public, and providing health coverage to employees. Most are part of general trade credit, which is quite large, so it is very likely to qualify under certain conditions. 

Purchase Equipment and Vehicles For Depreciation Deductions

Businesses can take tax deductions on commercial equipment, vehicles, and sometimes even real estate. Sometimes these deductions can be made within the first year of owning and using the equipment. The two most general types of accelerated depreciation are bonus depreciation and section 179 deductions.

Section 179 deductions enable you to immediately deduct the costs of certain goods when you use them. The maximum deduction was raised to $1 million in 2018 under the TCJA. Equipment, machinery, and certain property acquisitions may be eligible.

Bonus depreciation is an added benefit to asset acquisition. TCJA has also increased this tax exemption from 50% to 100% of the cost of activities commissioned from September 27, 2017, to January 1, 2023.

Write Off Bad Debts to Reduce Income

The end of the year is also a time to review accounts receivable if your business operates on a recruiting basis. First, find customers who are unlikely to pay you. You can pay the amounts owed as "non-performing debts" and deduct these amounts from your business income to save tax. NPLs can also include loans to customers, suppliers, or non-repayable employees. 

Evaluate Your Business Income and Expenses

Timing income involves moving it from year to year. You must first determine the year in which you intend to pay most of the taxes. Review your current taxes before the end of each year and pay some of them upfront if you want to lessen your income for the current year. You can also improve your expenses and reduce your income by spending expenses such as storing supplies.

Deduct the Cost of Gifts

Up to $25 per person can be deducted from the cost of gifts to customers and suppliers. There is an exception for those that bear your business name, are distributed as a matter of course, and costs less than $4.6

Cutting down on entertainment costs is a bit more complicated if you show your gratitude by paying for a good time. These costs are only deductible if it is directly related to your business.

Consult a qualified tax advisor

Consult a tax specialist before making a decision that could affect your tax return or spend money to save your taxes. Make sure you go with a specialist that can help you throughout the year, not just during taxes. Consider hiring a specialist who can represent you before the IRS if you are audited.

Elliot Kravitz, ATP
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