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Small Business Tax Planning: Top 10 Strategies

small business tax planning

As gratifying as growing revenue is for a small business, the swelling in corresponding tax liability can more than offset that satisfaction. Levies from state and federal governments, self-employment taxes, and excise taxes combine to form an onerous burden. For this reason, tax planning is essential for your company's survival and growth. This article will show you ways to minimize the tax bill and improve small business tax planning. Substantial business income necessitates aggressive tax planning, exploiting multiple tax planning strategies. Employing them effectively is the goal

#1: Review the Company's Legal Formation

Entrepreneurs have myriad options when starting a business. Sole proprietorship, partnership, limited liability company (LLC), S corporation, and C corporation are among the choices. Your business structure determines the manner in which you file taxes for your small business. Yet you are not locked into any one of these in perpetuity. 

As small businesses evolve, business owners can revamp the structure to better suit a firm's size. For instance, limited liability companies (LLCs) can opt for C corporation taxation regimes by filing Form 8832 with the IRS.

Pass-through businesses such as sole proprietorships, partnerships, LLCs, and S corporations are not subject to corporate income tax. In these cases, the company’s net revenue “passes through” to the small business owner’s personal tax liability, the highest tax bracket of which is 37 percent. LLC members who occupy the top tax bracket can enjoy substantial tax savings by changing their business entity.

Of course, the 21 percent corporate tax rate might become a memory if the U.S. Congress bumps it up to 26.5 percent. Yet tax savings are only one motivator to change the business structure. Seeking counsel from a competent tax advisor helps the small business owner to make an informed decision regarding which business entity to adopt.

#2: Claim All Legitimate Tax Deductions

Tax deductions are embedded in the IRS code to encourage certain financial behaviors and discourage others that may land you in serious trouble. For example, donations to religious organizations and other charities are deductible so people will freely give to their philanthropic work. To spur economic activity, the law allows for numerous tax deductions that favor small businesses. Among many others, these relate to:

  • Marketing and promotional activities that get your product or service in front of consumers' eyes in order to attract more dollars.
  • Insurance that covers any hardship or liability incurred in the course of regular operations.
  • Business meals - we all have to eat, and meetings over food serve both hunger and the bottom line.
  • Travel is also a common business expense and qualified business income deduction.
  • Education, whether degree-aimed or continuing, is an investment in both staff and the company's future. 
  • Retirement plan contributions are considered a positive by the ITS, and therefore often count as tax deductions.

Tax law recognizes many more areas where tax benefits apply, and it’s best to know where to turn. Professional accountants and taxation experts can discover many small business tax deductions of which you can avail yourself.

#3: Use Available COVID-19 Relief Benefits

Smart tax planning strategies cast a wide net for acceptable tax deductions. Significant tax savings are found with the help of COVID financial aid afforded by the Coronavirus Aid, Relief, and Economic Security Act (CARES). In many ways, this served as a jobs act to preserve employee income while business owners were struggling to stay afloat. The planks in this legislation include but are not limited to:

Employee Retention Credit

tax planning for small business

The Employee Retention Credit is a tax credit applied to what money a small business must pay toward Social Security. Eligible small business owners apply for this for every fiscal quarter for which they can demonstrate one of two occurrences:

1) The small business is under government order to cease and desist operating to prevent the spread of COVID-19. A business entity subject to such a mandate could be a restaurant, bar, bowling alley, barber shop, hair salon, hotel, professional sports franchise, or any number of small businesses deemed non-essential for the general public.

2) Small business loses substantial revenue because of shutdowns and decreased economic activity in response to the pandemic. For example, if restaurants are closed, their suppliers suffer from diminished business income. As long as they can accurately cite the pandemic as the reason, they may be entitled to these tax credits.

Sick and Family Leave Credits

The Families First Coronavirus Response Act of 2020 assists small business entities in affording their employees two weeks of paid sick leave. If the employee was quarantined and awaiting medical treatment, the small businesses must pay the worker's regular wage or salary. Alternatively, if the staffer stayed home to care for a COVID-affected family member under quarantine, that employee gets paid 66% of the regular wage.

Both of these tax law provisions were extended by the American Rescue Plan Act of 2021 to be in force until the end of September 2021. Under current tax law, small business taxpayers can apply for some of these retroactively by amending the filed tax return. This requires IRS Form 941-X.

#4: Delay Income - or Expedite It

Wise tax planning sometimes calls for putting off the receipt of certain revenue streams. Sometimes this involves the simple discipline of timing: billing in mid to late December to assure payment delivery in January of the following tax year. To defer taxable income is not to dodge or evade. Taxes on those funds will be paid. It merely shifts the tax burden to the subsequent tax year and buys some time to pay the tax.

Other tax planning tactics make use of accelerated income. Business owners, fearing a future tax increase, might seek to maximize their financial gains before the hammer falls. On the one hand, they can step up billing and collections before the tax year comes to a close. Conversely, they can hold off on paying bills until the new year or defer purchases altogether. This way, they retain more working capital for when they have to file their tax return.

#5: Shrink Your Adjusted Gross Income

Gross income is calculated by adding all revenues, wages, business income, investment dividends, capital gains, and retirement account proceeds, e.g. - together. Adjusted Gross Income (AGI) accounts for money that is redirected for a specific purpose. 

These embrace employer contributions to retirement accounts, alimony paid to an ex-spouse, interest paid on student loans, and expenses related to educator needs. Optimal tax planning for small business aims to keep AGI as small a number as possible. 

There are ways to do this. One is by making contributions to employee health savings accounts. Increasing retirement plan contributions, as far as the law allows, is another means of bringing AGI down. 

For independent business people, the home office deduction, if applicable, can significantly lessen the AGI relative to self-employment taxes. In addition, interest paid on business financing, real property, equipment, etc., can often be removed from gross income to yield a smaller AGI.

#6: Optimize Retirement Savings Accounts

small business tax strategies

Tax planning is essential for so many small businesses where there is a little financial cushion on which to operate. Maximizing gains from retirement plans help to add some financial breathing space.

  • Dot every "I" and cross every "t" when administering retirement plans as the sponsor. You avoid a slew of fees and penalties when you do this.
  • Pay attention to the 401k fee structures. Of late, fees have been declining, but it’s still wise to keep an eye out.
  • Pay close attention to what investment options are available for employees. Hire a fiduciary for this purpose if there are no internal candidates.
  • Raise the worker participation rate through education and periodic meetings.
  • Make a Roth 401k available so staffers can choose to be taxed upfront.

#7: Have a Plan to Reimburse Employees for Expenses

Expenses incurred by personnel in the course of conducting business are not uncommon. Food, travel, and entertainment are among the items that are the company’s responsibility as opposed to personal expenses. Yet these work-related costs are not properly classified as employee income. 

Accountable plans are vehicles that document reimbursement, as opposed to taxable income. If this money was to be identified as income, the business owner’s payroll taxes would be that much higher. Accountable plans are easily set up in consultation with a tax professional or tax advice firm.

#8: Weight Your Tax Return with the Work Opportunity Tax Credit (WOTC)

Life is unfair, and some hardworking, honest people face obstacles in securing sufficient employment. Small businesses need workers while workers nevertheless cannot find them. The WOTC grants tax relief for small business firms that make an effort to find and retain such job seekers. Among the targeted groups that WOTC-eligible small businesses are pointed toward are:

  • People from households that are receiving public assistance;
  • Veterans of the U.S. military;
  • Ex-Felons and those who have paid their debt to society;
  • Designated Community Residents (DCRs) who reside in areas designated as Urban Empowerment Zones or Rural Renewal Communities;
  • People afflicted with physical or mental disability who qualify for "vocational rehabilitation";
  • Those receiving nutritional assistance, Social Security Disability payments, long-term Family Assistance, or unemployment compensation.

All candidates who get hired must be screened and certified by IRS-approved state and local workforce operatives. The size of the credit cannot exceed the overall tax liability of the small business and what payroll tax is due for Social Security. Both taxable and some tax-exempt small business owners can claim the WOTC.

#9: Wait until Late in the Year to Procure More Assets

It is worthwhile now and then, as a tax planning device, to estimate business income toward the end of a tax year. Subsequently, acquiring tangible assets can help to lower your tax bill. These are assets with a fixed monetary value and are usually physical in nature. 

Depreciation is a way of formulating the asset's cost over its useful life, i.e. the timeframe in which the asset helped to initiate or multiply sales or other forms of revenue. The higher the depreciation, the less taxable income will be. Asset depreciation can only be counted if the tangibles are the tax year closes.

#10: Talk with a Tax Professional

Tax advice from a seasoned expert is more than preferable. It is a must. In the 21st century, the tax code is extremely complex, some would even say convoluted, and requires long hours of study, consultation, trial, and error to grow comfortable with its intricacies. Those established firms that clocked those hours in accounting, preparation, and representation know the advantages and pitfalls of a small business tax return.

Perhaps one of the most urgent reasons to retain a tax advisor is the avoidance of penalties and additional levies, many of which far outweigh the fees for a reputable tax advisor. Moreover, doing so saves the business owner many hours of research and compilation of an accurate return. 

Plus, peace of mind follows when a professional has charge of business income tax preparation. Meanwhile, you make audits less likely when a knowledgeable and proficient specialist is attending to your state and federal taxes. Best of all, a strong advisor will educate an owner so that future returns will not be so daunting.

The First and Last Word in Small Business Tax Strategies

Small businesses in the Chicago area and around the United States benefit from the tax planning services offered by the Lewis CPA firm. While tax planning for small businesses is important, many neglect it, but there is hope. For three and one-half decades, Lewis CPAs have assisted small business owners with tax preparation and IRS representation, as well as financial planning in other areas of operation. Additionally, we provide outsourced bookkeeping and business accounting services to companies that either lack the resources or the desire to field in-house teams. Contact Susan S. Lewis, LTD. for more information.

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