Running a small business can be extremely rewarding, but it also comes with complex tax obligations. As a business owner, you want to comply with tax laws while also minimizing your tax burden so you can keep more of your hard-earned profits.
The good news is there are many legal and ethical steps you can take to significantly reduce your small business taxes. In this comprehensive guide, we’ll walk through 19 of the top tax planning strategies to help you slash your tax bill in 2023.
1. Choose a Business Structure With Tax Benefits
One of the first decisions you’ll make when starting a business is choosing a business entity structure. The most common options are sole proprietorship, partnership, S-corporation, and C-corporation. Each of these entities is taxed differently, so consider the tax implications when making your choice.
For example, S-corps avoid double taxation as the business income passes through to the shareholders who report it on their personal returns. C-corps, on the other hand, pay taxes at the corporate level and shareholders also pay taxes on dividends. For this reason, S-corps are often more tax efficient for small businesses.
2. Take Advantage of Small Business Tax Deductions
One major advantage small businesses have over individuals is the long list of available tax deductions. Common write-offs include:
Startup costs
Home office deductions
Equipment, supplies, and software
Vehicle mileage and maintenance
Travel, meals, and entertainment*
Health insurance
Retirement plan contributions
Taking every deduction allowed can significantly reduce your small business income taxes. Make sure you’re tracking expenses properly and maintaining thorough records to back up these deductions if audited.
*Entertainment deductions have limitations following tax reform.
3. Use an Accountable Plan for Employee Expenses
Do you reimburse employees for business expenses? Setting up an accountable plan allows you to deduct these reimbursements without reporting them as taxable income to employees.
To qualify as an accountable plan, you must require employees to verify expenses, submit receipts, return any excess reimbursements, and file the expenses within a reasonable time period. Following the accountable plan rules saves both your business and employees money on taxes.
4. Take Advantage of Generous Depreciation Deductions
Thanks to tax code provisions like first-year bonus depreciation, Section 179 deductions, and accelerated depreciation methods, businesses can rapidly recover costs for capital expenditures.
For example, you can immediately deduct up to $1,080,000 in 2023 for qualified business assets under the Section 179 deduction. Any remaining cost can be depreciated over 5-7 years. Generous depreciation deductions provide a major tax advantage for small businesses investing in growth.
5. Take Advantage of Small Business Tax Credits
In addition to deductions, some businesses also qualify for valuable federal tax credits. For example, the Research and Development Tax Credit offers credits up to 9% of qualified research expenses.
Other potential small business credits include the Work Opportunity Tax Credit, Disabled Access Credit, and Credit for Employer-Provided Childcare. Read up on each of these to see if your business is eligible for major credits that can slash your tax bill.
6. Open a Solo 401k to Maximize Retirement Contributions
If you operate your business as a sole proprietor or single member LLC, opening a Solo 401k account can allow you to maximize tax-advantaged retirement savings.
Solo 401k plans combine employee and employer contributions, allowing you to contribute both as the business owner and on behalf of yourself as an employee. For 2023, you can contribute up to $66,000 in total per year – far more than a regular 401k. This slashes your small business taxable income while letting you save aggressively for retirement.
7. Expense Inventory Costs
For businesses that manufacture products or purchase inventory for resale, inventory costs are deductible. But you have options in how to deduct these costs that can impact your tax bill.
The most simple methods are deducting inventory when paid for or when sold. But tax laws also permit deducting estimated inventory shrinkage and obsolescence as well. Expensing inventory strategically can provide ideal tax results based on your business’ needs.
8. Deduct Startup Costs
Launching a new business venture comes with many expenses. While startup costs are not immediately deductible, the IRS does allow you to deduct up to $5,000 in startup costs in the first year and then amortize the remaining amount over 15 years.
This allows you to offset income during the critical early years of your business while deducting initial startup costs over the long run. Keep detailed records so you can take advantage of this beneficial provision.
9. Choose Your Accounting Method Wisely
As a business owner, you can choose between the cash and accrual methods of accounting for your company’s books and taxes. Cash basis accounting is simpler, but accrual may provide more favorable tax planning opportunities.
For example, an accrual method allows you to time income and expenses to your advantage. Work with your accountant to determine the best option based on your specific business operations and needs.
10. Set Up a Retirement Plan for Employees
Do you have W-2 employees? Offering a retirement savings option for them benefits your business too. Contributions are tax deductible for the business. Meanwhile, contributions on behalf of employees are excluded from taxable wages. This results in major tax savings for both you and your workers.
Having an employer-sponsored plan can help you attract and retain top talent while slashing your business’ taxable income. It’s a winning solution for both your company and employees.
11. Don’t Overlook Expenses Paid For Personally
Self-employed individuals and small business owners should conduct a thorough assessment of their potential for qualified unreimbursed business expenses and other eligible deductions. These expenses offer a valuable chance to reduce the costs associated with different aspects of your business operations, including items like vehicle mileage, home office space, cell phone usage, professional fees, and more.
To make the most of these deductions and potentially reduce your overall tax liability significantly, it's crucial to meticulously analyze your expenses. This analysis should involve identifying all items or resources that have been used for business purposes and calculating the percentage of time they were used for business. This detailed allocation can result in substantial tax savings.
12. Take Advantage of Mid-Quarter Conventions
Real estate businesses and those purchasing heavy equipment should be aware of mid-quarter depreciation conventions. This allows for accelerated write-offs when an asset is acquired mid-year.
Rather than waiting until the next year, you can start depreciating mid-quarter purchases immediately. Talk to your CPA to ensure you’re taking full advantage of opportunities like mid-quarter conventions.
13. Expense Assets Up to $2,860 Immediately
Small incidental purchases like computers, furniture, and equipment below $2,860 can be deducted immediately rather than depreciated over time. Known as the “de minimis safe harbor election,” this simple option provides immediate tax savings for minor investments.
Just keep diligent tracking to ensure you don’t exceed the $2,860 annual limit per item. With proper records, this election provides a lucrative tax break for small and medium-sized businesses.
14. Write Off Bad Debts
Sometimes despite your best efforts, customers fail to pay for goods or services purchased on credit. These bad debts cannot just be written off on your books - you must also claim them as a tax deduction.
Review accounts receivable near the end of each year to identify bad debts to write off. Just be sure to make reasonable collection efforts and properly document these debts to preserve your deduction.
15. Transfer Appreciated Assets Upfront
Do you plan on eventually selling business assets like real estate or equipment to an employee or family member? Consider transferring the assets now.
Selling assets while still incorporated allows you to pay the lower corporate capital gains tax rate. If you wait until after dissolving the corporation, proceeds from the sale could get taxed at higher ordinary income rates.
16. Get Professional Help to Plan Ahead
Tax laws are constantly evolving, and planning your small business taxes can be extremely complicated. Working with an experienced tax professional is critical for making informed decisions and avoiding mistakes.
At United Tax we can help project your income, run scenarios to minimize your tax liability, and ensure all returns are properly filed. A few hundred dollars spent on tax planning is wise investment that can save you thousands down the road.
The Bottom Line - Small Business Tax Planning Strategies
Paying taxes is an obligation for every small business, but you don’t have to settle for cutting a maximum check to the IRS. With proactive tax planning using deductions, credits, retirement plans, expense timing, and other strategies, small business owners can take control of your tax bill and potentially cut it substantially.
At United Tax we understand how different business structures and accounting methods affect taxes, and don’t be afraid to ask questions. Applying these tips can help you gain a competitive advantage by maximizing after-tax income you can reinvest and grow your business. Contact us today if you would like a detailed tax analysis or would like to engage us for some of our other business solutions.
