Tax Tips for Small Business Owners To Slash Your Taxes
Hey there small business owner, want to know the secrets to paying less in taxes and keeping more of your hard-earned money in your pocket? Of course you do, who doesn’t love saving money while sticking it to the tax man at the same time. Read on to learn some tax tips for small business owners.
As a small business owner for over 15 years, I’ve learned the insider tips and tricks to maximize your deductions and minimize your tax liability. The government takes enough from us already, am I right?
In this article, I’m going to reveal the strategies I’ve used to slash tens of thousands off my tax bill year after year. Fair warning, some of these tactics may seem aggressive but I assure you they are perfectly legal.
The tax code is complicated but with the right know-how, you can make it work for you not against you. If you’re ready to unlock the keys to paying less taxes and gaining more financial freedom this tax season, read on to discover the secrets the government doesn’t want you to know.
Record Keeping Is Key for Tax Deductions
Keeping good records is the key to maximizing your tax deductions and paying less to the tax man. As a small business owner, you need to track all business-related expenses to claim them. This is one of the very important tax saving tips for small business owners.
Tax Saving Tips for Small Business Owners – Receipts
Keep receipts for everything—meals, office supplies, equipment, travel, you name it. File them by category in clearly marked folders. When tax time comes around, you’ll have all the documentation you need.
Separate Business and Personal
Keep business and personal expenses separate. Have dedicated business accounts, credit cards, and budgets. Don’t mingle funds or pay for personal items from your business accounts. The IRS can disallow deductions for mixed expenses.
Small Business Tax Tips – Document Your Miles
If you drive for business, keep a mileage log to deduct vehicle expenses. Note the date, destination, purpose, and miles for each trip. The IRS allows a standard mileage deduction of 65.5 cents per mile in 2023. That can add up to major savings!
Tax Tips Small Business – Home Office Deduction
If you have a dedicated home office, you may be able claim the home office deduction as a self employed business. You’ll need to measure the office space and keep records of home office expenses like rent, insurance, utilities, and maintenance costs. The requirements here are strict, so check with an accountant.
Tax Tips for Small Business – Hire an Accountant
Unless you’re very tax savvy, hire an accountant to help you set up a good record keeping system and prepare your taxes. They can help ensure you claim all the deductions you’re entitled to and avoid issues with the IRS down the road. Their fees are also usually tax deductible!
Keeping immaculate records may seem tedious, but it will pay off hugely when tax season comes around. With the right documentation and deductions, you can slash your small business taxes and keep more of your hard-earned money. Another one of the important tax tips for small business owners.
Make the Most of Business Tax Credits
As a small business owner, you work hard for every dollar. Why not take advantage of some tax credits to keep more of that money in your pocket? The government offers several incentives for small businesses like yours.
Energy-Efficient Commercial Buildings Tax Deduction
If you made capital improvements to an existing building after 2021 that improved energy efficiency, you may qualify for a tax deduction of up to $1.88 per square foot. Things like upgrading lighting, heating, cooling or the building envelope can add up to major savings.
Tax-Saving Tips for Small Business Owners – Disabled Access Credit
Did you make changes to accommodate customers with disabilities, like wheelchair ramps, Braille signage or accessible bathrooms? You may be eligible for a tax credit equal to 50% of expenditures over $250, up to $10,250.
Small Business Healthcare Tax Credit
Providing health insurance for your employees? You may qualify for a tax credit of up to 50% of premiums paid. The amount depends on the number of employees and average wages. Check with the IRS for details.
Work Opportunity Tax Credit
Hiring workers from certain target groups like veterans, food stamp recipients or vocational rehabilitation referrals? You could earn a tax credit up to $9,600 per qualified new hire.
The list goes on. From hiring new employees to workplace improvements, many of the things you’re already doing for your business may translate to tax savings. A little research now can yield big rewards come tax time. Why not give yourself a raise by taking what’s owed to you? You’ve earned it!
Set Up a Retirement Plan to Lower Your Tax Bill
As a small business owner, one of the best ways to slash your tax bill is by setting up a retirement plan. Contributions you make to retirement plans like an IRA, SEP IRA, or solo 401(k) can lower your taxable income.
Tax Tips for Small Business Owners – SEP IRA
If you have employees, a SEP IRA allows you to contribute up to 25% of your compensation or $40,000 per year, whichever is less. As the employer, you’re responsible for funding the plan but contributions are 100% tax deductible. Your employees’ contributions are tax deductible as well.
For sole proprietors or businesses without employees, a solo 401(k), also known as an individual 401(k), is ideal. You can contribute up to $19,000 of your compensation per year, plus up to 25% of your compensation in employer matching, for a total of $40,000. Contributions to a solo 401(k) are tax deductible, allowing you to save thousands on your taxes each year.
As a small business owner, you can also open a traditional or Roth IRA and contribute up to $6,000 per year ($7,000 if 50 or older). Contributions to a traditional IRA may be tax deductible, depending on your income and whether you participate in an employer-sponsored plan. Roth IRA contributions are not tax deductible but qualified distributions in retirement are tax-free.
Establishing a retirement plan is one of the smartest tax moves you can make as a small business owner. You’ll benefit from tax-advantaged contributions and tax deductions now and have a source of income for your golden years.
Talk to your financial advisor about which options make the most sense based on your business structure and financial goals. With the right plan in place, you’ll be well on your way to reducing your tax burden and securing your financial future.
Claim the Home Office Deduction
As a small business owner, you’re entitled to deduct expenses for a home office if you meet certain requirements. This little-known tax deduction can save you thousands each year, so it pays to understand the rules.
To qualify for the home office deduction, your home office must be your principal place of business or used regularly and exclusively for your business. That means no personal or family use of the space.
The office can be a dedicated room or just a corner of another room. As long as you use it regularly and exclusively for your business, you can claim a deduction.
Calculate Your Deduction
You have two options for calculating your home office deduction:
- Simplified method – You can deduct $5 per square foot for up to 300 square feet of office space. So if your office is 200 square feet, you can deduct $1,000.
- Regular method – Calculate the actual expenses for the business use of your home, including the percentage of rent, mortgage interest, taxes, insurance, repairs, and utilities. You must determine the percentage of your home used for business to deduct a proportionate share of these costs. For example, if 25% of your home is an office, you can deduct 25% of the costs.
To claim the deduction, you’ll report your home office expenses on Schedule C, the form for self-employed taxpayers. You’ll need records to substantiate your deduction like floor plans, utility bills, rent or mortgage statements, and logs of time spent working in your home office.
The home office deduction can be complicated, but for small business owners working from home, the tax savings are well worth the effort to determine if you qualify and calculate your deduction correctly.
Talk to your tax professional if you have any questions about deducting your home office. They can help ensure you take advantage of every tax break you’re entitled to as a small business owner.
Hire Your Kids to Save on Taxes
One of the best ways for small business owners to slash their tax bill is to hire their own children. As a business owner, you’re able to deduct reasonable wages paid to employees, including family members. Hiring your kids, especially for simple jobs they can do after school or during summer break, is a win-win.
Pay them fair wages for work actually done
The key is to pay your kids the going rate for the tasks they perform. Have them track the hours they work and the duties they do. As long as you keep good records showing their hours logged and pay them a reasonable wage for the chores they complete, the IRS should allow the wages as a business deduction. Some jobs for teens could be:
- Social media manager – Help run your social accounts and engage with customers.
- Virtual assistant – Handle scheduling, emailing, data entry and more.
- Website tester – Review and test your company website and online services. Provide feedback to improve user experience.
- Marketing associate – Assist with marketing campaigns, customer research, and promotions.
Contribute to their Roth IRA
Another one of the tax tips for small business owners, is hiring your kids. That means you’re able to contribute to their Roth IRA. The contribution limit for a teen with earned income in 2021 is $6,000. As the business owner, you can match your child’s Roth IRA contributions up to this limit. The money in the account can grow tax-free and be withdrawn tax-free in retirement.
Teach them financial literacy
Employing your kids also provides an opportunity to teach them important financial and business skills that will benefit them for life. They can gain firsthand experience handling money, meeting work responsibilities, and contributing value to your company. These types of real-world learning opportunities are invaluable.
Another one of the tax tips for small business owners, is hiring family members in your small business. This is a savvy tax strategy worth considering. Be sure to keep good records and pay fair wages for work actually performed. The tax savings, opportunity to fund a Roth IRA, and financial learning benefits for your kids are well worth it.
You now have the insider knowledge to make a real dent in your small business tax bill. While the tax code may seem complicated, taking advantage of deductions and loopholes designed specifically for small business owners can add up to major savings.
Take the time to implement these strategies and you’ll be keeping more of your hard-earned money where it belongs – in your pocket. With extra cash on hand, you’ll have the means to invest in your business, hire new employees, or maybe even take that long overdue vacation. The bottom line? Knowledge is power, so put these tax tips for small business owners to work and get ready to slash your small business taxes.
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