Seven tax strategies that save small businesses money

by Tim Streeter, CPAMay 16, 2024Blog

Taxes are a constant for any business. They come due every year, whether you have a profitable year or are in times of economic downturn. Managing your taxes is an important business function that assists you with decisions throughout the year to maximize your tax deductions and save taxes.

Businesses must consider numerous types of taxes throughout the year. These include income taxes, payroll/employment taxes, including FICA and social security taxes, sales taxes, and excise taxes (for specific industries). In the article below, we’ll discuss simple measures for saving your business and your employees’ taxes.

1.Set up a strong bookkeeping process.

Establishing a bookkeeping process that properly accounts for income and expenses is essential to every business. Not only do you have to record expenses in the proper category, but you must have proof of those expenses saved in the event of an audit. Mistakes in the bookkeeping process can cost your business money in taxes and penalties.

2. Informed tax elections

Certain purchases that must be depreciated can be claimed on an accelerated basis to decrease your tax liability for the year. For example, real estate property can be sold via an installment sale, allowing you to spread the tax out over future years as payments are received.

3. Defer income or accelerate deductions.

For cash basis taxpayers, sending out invoices to clients a few days later can sometimes push income into the next year. In addition, paying bills in December, which are due in January, is one way to increase your expenses, lowering your taxable income for the current tax year.

However, with the Tax and Jobs Act of 2017 sunsetting on December 31, 2025, it may be advantageous to accelerate income to take advantage of current tax laws for items like the Qualified Business Income Deduction and lower tax rates.

4. Update the business structure.

Your current business classification may not be the most tax advantageous as your business grows. Different types of business classifications offer different levels of protection and tax benefits. An LLC or sole proprietorship, an S corporation, and a C corporation all have different tax attributes. Please consult with our tax professionals and explore the entity type best for you.

5. Increase employee benefit plans.

Employee raises are a great way to thank the business and the employee for a job well done. Unfortunately, they also come with increased taxes for both the business and the employee. When the business is doing well, consider revamping employee benefit plans and contributions. This could include paying a higher portion of medical, dental, and vision plans, increasing retirement plan match contributions, or even providing a profit-sharing contribution to employee retirement accounts.

6. Stay aware of your Adjusted Gross Income.

Your personal adjusted gross income (AGI) and modified adjusted gross income, in some cases, are used to determine your marginal tax rate and eligibility for certain deductions and tax credits. Year-end planning is important in managing your adjusted gross income.

7. Keep current on tax law.

Tax laws are constantly evolving. Congress passes new acts throughout the year that may significantly impact on your taxes. The IRS also releases clarifications on tax codes that can change how tax professionals and businesses interpret them. Sign up for updates on our website, KBSCPA.com, and keep yourself informed throughout the year.

Tax planning is an important strategy for every successful business. Contact our team of professionals to discuss your current tax strategy and potential savings today.