This post was originally published on February 24, 2022, and extensively updated on May 17, 2024.
As a business owner, managing seemingly endless obligations is just another day. One moment, you may be handling a human resources issue, and the next, you may be coping with a customer complaint. Wearing many hats can make it difficult to stay on top of other aspects of running a business, such as taxes.
At CMP, we’re familiar with the tax challenges that small businesses face. One of the most frequently asked questions we hear from our business clients is this:
What’s the best small business tax planning strategy?
A tax strategy is essential because it governs everything you do and provides a framework that allows you to fulfill your tax obligations without overpaying. This post will review some business tax basics and reveal 19 of the best small business tax planning strategies for business owners.
Reduce Tax Liability with These Small Business Tax Planning Strategies
Here are 19 tax strategies to help you minimize your tax burden and save money at tax time.
1. Look for Ways to Reduce Your Adjusted Gross Income
If your business is a pass-through entity, you’ll report your business earnings on your personal tax return. If you pay yourself a salary, you must also report your earnings and pay taxes.
Many of your taxes are tied to your adjusted gross income or AGI. For example, if your AGI doesn’t exceed $200,000 or $250,000 if married and filing a joint return, you won’t be required to pay the additional 0.9% in Medicare taxes. You can lower your AGI by reducing your salary or doing one of the following things:
- Contributing to a tax-deferred retirement plan
- Itemizing deductions if they exceed your standard deduction
- Contributing to a health savings plan
If you want to itemize deductions, consider tracking them on a spreadsheet throughout the year. That way, you won’t need to scramble to calculate them at tax time.
2. Be Strategic with Your Tax Elections
Applying some strategies to your business expenses can help you reduce your taxable income. For example, if you acquire new business equipment or machinery, you can deduct up to 60% of the cost under the 2018 tax law (TCJA).
However, you may want to consider depreciation as an alternative for new businesses or those that aren’t yet turning a profit. Depreciation allows you to deduct the value of your purchase in future tax years instead of all at once. That’s beneficial if you expect your profits to increase and push you into a higher tax bracket.
Other tips include:
- Deducting home office expenses based on actual costs or the IRS simplified rate, which is $5 per square foot up to 300 square feet of space.
- If a disaster has impacted your business, you can claim the losses on your prior year’s returns instead of the year when the disaster occurred.
- You can choose between deducting vehicle expenses based on the actual cost or the IRS mileage allowance of 65.5 cents per mile for the 2023 tax year and 67 cents per mile for the 2024 tax year.
- Deduct business insurance expenses, including liability, workers’ compensation, commercial auto, and business interruption services insurance.
The IRS scrutinizes insurance deductions closely, so ask your accountant before taking deductions.
3. Rethink Your Exit Planning Strategy and Wealth Transfer Strategies
In 2024, looking at economic conditions and rethinking your business exit plan and wealth transfer strategies is essential. Here are some things you can do to minimize your tax burden and protect your business in 2024.
- Review your estimated net income. If your income is lower than expected, you may want to seek out tax credits and other tax benefits that you didn’t qualify for at a higher income level. If your income is higher than expected, you can get aggressive with deductions by donating and finding other ways to reduce your taxable income.
- Reassess your business entity. As your business income increases, it may become necessary to reconsider your business structure from a tax perspective. If you’re a sole proprietor, you may want to incorporate as an LLC, and some LLCs may wish to file as an S corporation to save taxes.
- Optimize Your Retirement Plan. It’s possible to save thousands of dollars by offering your employees a retirement plan and using your contributions to lower your tax burden.
- Evaluate Your Business Succession Plan. If you already have a business succession plan, this is a good time to review and make changes as needed. If you don’t have one, then you’ll need to create one to prepare your heirs for what will happen when you’re ready to hand the reins over to them.
Working with a tax professional can help you evaluate your strategies and make the most of any opportunities to secure your business succession plan and wealth transfer strategies.
4. Acquire Assets at the End of the Year
In some tax years, estimating your business taxes and acquiring new and used assets to reduce your taxes may be beneficial.
The Tax Cuts and Jobs Act of 2018 allows 80% bonus depreciation for business assets acquired in 2023. The bonus depreciation percentage drops to 60% for 2024.
If you acquired assets before 2023, you may be eligible for a 100% bonus depreciation. It may be worthwhile to take advantage of, particularly in years when your profits have been high. It is important to remember that assets you purchase must be placed in service before the end of the tax year.
5. Help an Employee with Student Loans
The CARES Act, signed into law in 2020, included a provision allowing employers to assist employees with student loans. If an employer repaid part of an employee’s student loans, the employee had to pay taxes because the payments were seen as income.
Discover how different types of income are taxed in our blog post: Breaking Down Income Types: How Each Is Taxed. Understanding how your income is taxed is crucial for proper financial planning. Our article comprehensively summarizes various income sources, including wages, investments, rental earnings, and more. Gain valuable insights into the tax implications of different income types, helping you confidently navigate the complex world of taxation.
The CARES Act included an exception that allows employers to get a payroll tax exemption for repaying employees’ student loans. The repayments are excluded from employees’ income, meaning that they don’t have to pay taxes.
This provision will remain in effect through 2025 and allows employers to earn some goodwill with employees while saving money on payroll taxes.
6. Establish Fringe Benefit Plans for Employees
When you increase employees’ wages, you also trigger higher employment tax costs. One way to get around that is to offer fringe benefits as part of employees’ total compensation.
Some of the tax-exempt benefits you may want to consider include the following:
- Medical and dental insurance
- Long-term care insurance
- Disability insurance
- Group term life insurance
- Childcare assistance
- Tuition reimbursement
- Transportation
- Employee meals
- Student loan payments (see above)
You can find more information about eligible fringe benefits here.
7. Take a Tax-Free Loan from Your Business
Many business owners don’t know that they can take out a low—or no-interest loan from their business. To ensure compliance, be sure to review the Applicable Federal Rates set by the IRS.
You can check out the current IRS set rates here. They update monthly; you should ask your accountant before implementing this strategy.
8. Don’t Ignore Carryover Deductions
You already know that some deductions have limitations. The same is true of tax credits, which means that you may need help to be able to use them fully in the current year. However, you may not be aware that some of these deductions allow a carryover to future years.
Examples of carryovers include capital losses, general business credits, home office deductions, net operating losses (up to 80% of taxable income), and charitable contributions.
9. Use Accountable Plans
Do you reimburse your employees for travel and other costs? If you do, you may want to use an accountable plan. An accountable plan allows you to deduct the expenses without reporting the reimbursements as employee income. In other words, it can reduce both your employment taxes and your overall taxable income.
As a bonus, using an accountable plan can also save your employees money on taxes. Under the 2018 Tax Cuts and Jobs Act (TCJA), employees can no longer deduct miscellaneous unreimbursed employee expenses.
10. Abandon Property Instead of Reporting it as a Capital Loss
If your business owns property that has no value, you might be tempted to sell it and report it as a capital loss on your taxes. However, there are some benefits to abandoning it instead.
Abandonment of property allows you to take an ordinary loss, which is fully deductible, instead of a capital loss, which is subject to limitations. Keep in mind that a Section 1231 property may be ordinary or capital, depending on other Section 1231 losses for the year and prior losses.
11. Defer Taxable Income
Are you using the cash method of accounting for your business? If you are, you can take advantage of that by carefully managing your business taxable income to minimize your taxes. If you anticipate that your business income will be taxed at the same (or lower) rate in 2024, here are a few tips to help you defer some of your income:
- Put recurring expenses on your credit card. You can deduct them in the current year even though you won’t pay the credit card bill until next year.
- Mail checks a few days before the end of the year. You can deduct the expenses in the year you mail the checks. If you’re mailing a big check, use registered mail to prove the mailing date.
- Prepay expenses at the end of the year, provided that the benefit does not exceed IRS limitations (the earlier of 12 months before the first date on which your business realizes the benefit or the end of the next tax year). For example, you could prepay your office rent or prepay some of your insurance premiums.
- Bunch expenses. It may be helpful to bunch expenses toward the end of the year to maximize your deductions.
- Delay sending invoices until the last few days of the year. That way, you’ll receive payment in the new year and can report the income in the new year as well.
You’ll need to be cautious with the last strategy. Don’t delay sending invoices to customers who pay slowly. Keep in mind that if you defer your expenses, you’ll need to report them in the following year. There’s no special filing deadline for deferments.
12. Hire Your Spouse or Children
If your spouse or children can contribute to your business, put them on the payroll. Kids can work tax-free if their income is below the IRS threshold. The Tax Cuts and Jobs Act of 2018 nearly doubled the exemption amount for dependent minors.
You can take the money you pay your kids and put it into an education savings account or Roth IRA as a bonus. You also won’t need to withhold payroll taxes. Consult your accountant on applying this to your situation, as entity type matters in order to participate in this.
13. Evaluate Your Business Entity Type
The business entity type you choose significantly impacts your tax liability. As we mentioned, people who are sole proprietors, have limited partnerships or certain limited liability companies, and are on the hook to pay self-employment taxes. Depending on how much you earn as a sole proprietor or as an employee of any pass-through entity, you may also have to pay the additional 0.9% Medicare tax.
If your estimated business taxes are high, you may want to consider reorganizing your business as a different type of entity. Navigating the ins and outs of different business entity types can be confusing, so working with a tax professional to determine the appropriate structure for your business is beneficial.
14. Write Off Bad Debts
As a business owner, you may sell products or services to customers on credit. For example, many companies invoice clients and give them 15 or 30 days to pay. When you’ve delivered goods and services, your instinct may be to try to collect them continually, but that’s not always the most advantageous tax approach.
As the end of the tax year approaches, you should review your accounts, including past-due invoices and loans you may have made to employees or vendors, and consider whether they should be written off as bad debt. Writing these debts off can help you offset what you owe on your taxes and reduce your overall tax obligation. It’s important to note that this applies to accrual-basis taxpayers only (see below).
15. Review Your Accounting Method
As a business owner, there are several accounting methods, and in some cases, you may have a choice about which method to use. The two most common methods are the cash method and the accrual method.
With the cash method, you must report any money you receive and any business expenses you incur in the year you pay them. This method is available to many small businesses, but businesses with average receipts of more than $25 million for the past three years aren’t eligible.
The other option is the accrual method, which allows you to report income in the year it’s earned and expenses in the year they’re incurred. Both methods have benefits, and you should consult with your accountant to determine which best suits your business needs.
16. Check If You’re Eligible for Penalty Relief
Sometimes, despite their best efforts, business owners incur a penalty from the IRS. The penalty could be because they missed a tax filing deadline or underpaid their taxes, and in some cases, the penalties can be significant.
If you incur a penalty, seeing if you’re eligible for penalty relief is worthwhile. Some circumstances that may be eligible for penalty relief include:
- Failing to file a tax return
- Failing to pay on time
- Failing to deposit taxes as required
You can check with the IRS or your accountant to determine your eligibility for penalty relief. Often, the IRS will remove the first penalty assessed to you.
17. Pay Down Your Debt
If you have an outstanding business loan and cash on hand, you may want to make extra payments or even pay off the loan entirely to deduct the interest when you file your tax return.
Keep in mind that the IRS doesn’t allow an interest deduction for personal expenses paid with a credit card. You can view IRS Publication 334 for information about non-farm business interest deductions and IRS Publication 225 for interest deductions for farms.
18. Stay Updated on the Latest Small Business Tax Law Changes
There are several important changes to tax law that you’ll need to know in 2024.
- Increased Standard Deduction. The IRS has increased the standard deduction to $13,850 for single filers and married filing separately, $27,700 for married filing jointly and qualified widows/ers, and $20,800 for single heads of household. Single taxpayers who are 65 or older and those who are blind can take an additional $1,850, while married/widowed taxpayers can take an additional $1,500.
- Updated Tax Brackets. You can view the updated brackets on the IRS website, here.
- Business Meal Deduction. During the COVID-19 pandemic, the IRS allowed for 100% of business meal costs to be deducted. For 2024, the amount has reverted to its pre-pandemic level of 50%.
- Bonus Depreciation. The Tax Cuts and Jobs Act temporarily allowed business owners to write off 100% of the cost of qualified assets placed into service from September 27, 2017, through January 1, 2023. Bonus depreciation allows an 80% deduction for 2023 and a 60% deduction for 2024. The deduction will decrease by 20% per year and expire in 2027.
- Employer Retirement Plan Start-Up Credit. For the 2023 tax year, small employers with 101 or fewer employees can deduct 50% of the start-up costs associated with a new retirement plan. The deduction may be taken for a maximum of three years and caps out at $5,000 per year.
We’ll update this post to keep you informed if any new changes are made
19. Consult a Tax Advisor
One of the best things you can do as a small business owner to minimize the tax you’re required to pay is to consult a tax advisor. Even if you keep a close eye on business news and stay up to date on tax law changes, you still need professional advice to help you file your taxes.
Business tax filings can be complex, and the penalties for mistakes or oversights can be high. Ultimately, paying for a tax advisor will be less expensive than cleaning up the aftermath of a mistake with your taxes.
The AMT credit can help you avoid paying a higher tax rate by offering a dollar-to-dollar reduction on previous years' taxes. Check our blog post, Alternative Minimum Tax Explained to find out how this works.
Small Business Tax Planning FAQ
Here are a few questions that we often hear from clients about small business tax planning.
How Much Does a Small Business Pay in Taxes?
This is a frequently asked question because people want to know how much they’ll need to pay so they can prepare and have the money they need to meet their tax obligations.
The short answer is that every small business is unique, but we can still give you some idea of what to expect. The Small Business Administration released figures that showed an average of 19.8% as the effective tax rate for small businesses. The percentages can vary depending on your business structure and other factors.
Business owners may need to pay six basic types of taxes. They are as follows:
- Income tax
- Self-employment tax
- Estimated tax
- Employer tax
- Excise tax
- Sales tax
The Tax Cuts and Jobs Act of 2017 changed the tax code for corporations. As of January 1, 2018, C corporations have a flat corporate income tax rate of 21%. This rate does not apply to other business structures. You should keep in mind that if you have a sole proprietorship or partnership—and in some cases, an LLC—you may need to pay self-employment tax.
Why is Tax Planning Important for Small Businesses?
As a business owner, paying taxes is your duty, but the amount you owe should never be a surprise. It’s essential to understand how business taxes work and estimate the amount you need to pay each quarter or year to ensure that you have the appropriate amount of money.
Tax planning can help you make accurate tax estimates, make all tax filings and reports on time, and avoid the potential repercussions of not doing so. As business taxes can be complicated, we recommend working with an experienced tax professional to help you plan. Tax planning is often the best way to find tax savings.
How Can Setting Up or Adding to a Retirement Savings Plan Benefit Small Business Tax Planning?
If you set up a new retirement plan for your employees, such as a 401(k), SEP IRA, or SIMPLE IRA, you may be eligible to deduct up to 50% of your start-up expenses for up to three years. The maximum deduction is $5,000; you must have fewer than 101 employees to qualify.
There are some rules about when the plan must be started to qualify. You can read more here. There may also be an option to deduct part of your employer matching contributions. Make sure to check with a financial professional before claiming this deduction.
If you are unsure about how to go about setting up a retirement plan for your company, CMP can help with our Retirement Plan TPA Services.
How Do Equipment Deductions and Green Energy Tax Credits Factor into Small Business Tax Planning?
The bonus depreciation percentage was 100% from 2020 to 2022 as part of the economic stimulus related to the COVID-19 pandemic. Starting in 2023, the percentage is slated to decrease by 20% each year. Therefore, it may be worthwhile to buy new business equipment in 2024 to take advantage of the 60% deduction for this year before it decreases again in 2025.
Green energy tax credits were included in the Inflation Reduction Act. There are almost $400 billion in available credits that may be used to offset the expense of buying electric or hybrid clean vehicles for your business and other steps that can decrease your carbon footprint. You should check with a financial professional to understand your qualifications.
How Can Adopting Pass-Through Entity Status Aid in Small Business Tax Planning to Reduce Taxes?
Pass-through entities include some businesses that may be on the hook for business income taxes. These include S corporations and LLCs. Several states have implemented a pass-through entity tax that may be deducted from your business’s federal tax return.
Utah enacted a pass-through entity tax in 2022. In total, 35 states have enacted a PTE tax, including California and Arizona.
Final Thoughts on Small Business Tax Strategies
Calculating, filing, and paying your business taxes can be a time-consuming and expensive endeavor. The 19 small business tax planning strategies we’ve reviewed here can help you understand your tax obligations and minimize your tax burden as you head into 2024.
Need assistance with your income tax strategy? CMP, a trusted accounting firm in St. George and throughout Utah, with additional locations in Salt Lake City and Logan, can help you develop an effective tax plan tailored to you and your business. Contact us today to get started!
