Small business owners naturally begin considering ways to lower their business taxes as tax filing season draws near. There are several year-end Tax-saving strategies for small businesses that can assist lower your overall tax burden, from utilizing available credits and deductions to strategically timing income and expenses. seao.info will provide for you five Tax-saving strategies for small businesses should take into account in order to reduce their tax liability and keep more money in their own pockets.
5 Tax-saving Strategies for Small Businesses
1. Consider a tax status change
You as a small business owner have a variety of alternatives for how to set up your company. A single-person business, a partnership, a limited liability company (LLC), a S corporation, or a C corporation are all options. How you submit your small business taxes will depend on your organizational structure.
You might be allowed to switch to a different business structure if you’ve outgrown your existing one in the last year. For instance, by submitting Form 8832 to the IRS, LLCs might choose to be taxed similarly to a C corporation.
Making such a choice used to be uncommon because the top corporation tax rate was 35%, but according to the Tax Cuts and Jobs Act of 2017 (TCJA), it is now only 21%.
2. Take advantage of tax deductions
Tax-saving strategies for small businesses, Although it has various restrictions and limits, the qualified business income (QBI) deduction offers pass-through business owners a deduction for up to 20% of their portion of the business’s income.
If their income is too high, owners of specified service trades or businesses (SSTBs) are not eligible for the deduction. In general, service-based businesses that depend on the reputation or expertise of its owners or workers are considered SSTBs, with the exception of engineering and architectural organizations.
These kinds of SSTBs include, for instance:
- law offices
- health procedures
- consulting businesses
- seasoned athletes
- the performing arts
- Accountants
- financial consultants
- investment specialists
Your QBI deduction phases down if your company is an SSTB once your total taxable income reached a specific level. These thresholds are $170,050 for single filers and $340,100 for married couples filing joint returns for the 2022 tax year. You must utilize Part II of Form 8995-A to determine your deduction; however, you are no longer eligible to claim it if your income exceeds $220,050 for single filers and 440,100 for married couples filing jointly.
The deduction is only available if your company isn’t an SSTB but your total taxable income exceeds the upper limitations.
- 50% of the W-2 wages you share that the company pays you, or 25% of those wages plus 2.5% of the qualifying property you share
Confused? It’s not just you. The QBI deduction can offer small business owners a large tax advantage, but determining who is eligible to use it and then figuring out the deduction is not a simple procedure. If you believe you may be eligible, speak with your accountant.
3. Leverage tax credits
Another approach for businesses to lessen their tax burden is through tax credits. Unlike tax deductions, which lower taxable income for both individuals and corporations, tax credits actually lower the amount of tax due. Here are several to Tax-saving strategies for small businesses.
Work opportunity tax credit
The Work Opportunity Tax Credit (WOTC) is intended to assist firms in retaining employees who belong to specific target groups and who have historically encountered significant employment-related hurdles. This includes people from other target groups, convicts, and members of families receiving benefits under the Temporary Assistance for Needy Families (TANF) program.
The credit has a maximum value of $2,400 per qualified new hire.
Small firms must hire people who belong to one of these target groups, complete Form 8850, and submit that form to a designated local state agency within 28 days of the new employee’s start date in order to qualify for the WOTC.
The business may claim the credit on their subsequent regularly filed return after the state agency has determined that the employee is qualified for the credit.
Credit for premiums for small employers’ health insurance
Small businesses may be eligible to clTax-saving strategies for small businesses credit to help defray some of the costs associated with offering health insurance benefits to their employees.
To be eligible, you must:
- have fewer than 25 employees who are full-time equivalents.
- Pay full-time equivalents on average less than $58,000 annually in 2022 (this number is indexed for inflation thus it varies every year)
- Through the Small Business Health Options Program Marketplace, purchase group health insurance.
- Pay each employee’s employee-only coverage at least 50% of the total cost.
If you are eligible, the credit is worth up to 50% of your annual premiums. The credit is available for two consecutive tax years.
4. Defer — or accelerate — income
On their books and tax returns, many small businesses employ the cash method of accounting. According to the cash approach, a business records income as soon as it is received and expenses as soon as they are paid, or when money is actually exchanged. This results in some creative Tax-saving strategies for small businesses.
Deferring income to the following year, when you would pay Tax-saving strategies for small businesses, may be a good idea if you anticipate being in a lower Tax-saving strategies for small businesses.
5. Set up — or contribute to — a retirement account
Your taxable income may be decreased by opening a retirement account or making contributions to one. There are various ways for business owners to save for their own and their workers’ retirement.
- You can write off any contributions made to a 401(k) plan that you set up before the end of the tax year when you file your tax return. How much an employer may contribute is determined by the rules of the plan. The sum of all employee and employer payments for 2022 is capped at $61,000, whichever is smaller.
- A simplified employee pension plan, or SEP, may still be an option if you miss the deadline to establish a 401(k) plan in 2023. To set up a SEP, you have until the due date of your return, including any extensions. The maximum amount of the employer’s contribution to a SEP for 2022 is $61,000, or 25% of the employee’s salary.
