As a small business owner, you might not be aware of all the deductions, credits, and other business income strategies that can help you lower your tax bill. That’s why we put together a list of 10 quick tips to help you keep your income where it belongs: out of the government’s coffers, and in your business!
1. Use the Qualified Business Income Tax Deduction
The qualified business income deduction (QBI) is a tax deduction that allows eligible self-employed and small-business owners to deduct up to 20% of their qualified business income on their taxes.
Entities who qualify include sole proprietorships, partnerships, S corporations, and limited liability companies (LLCs). Additionally, your total taxable income needs to be below $170,050 for single filers and $340,000 for joint filers in 2022. (Note: In 2023, those numbers will rise by about $10,000 each).
2. Fund Your Retirement Plan
When you contribute to your retirement plan, you’re essentially paying yourself and being rewarded for it in the form of tax deductions. For small business owners, there are several different retirement plans to choose from, including:
- Traditional or Roth IRA
- Solo 401(k)
- SEP IRA
- SIMPLE IRA
- Defined benefit plan
Each retirement plan has its own tax advantages, so make sure you meet with a Certified Public Accountant (CPA) to discuss which option is right for your business.
3. Take Tax Credits
Unlike tax deductions which reduce the amount of your taxable income, tax credits reduce your tax bill on a dollar-for-dollar basis.
There are a multitude of small business tax credits that you may be able to claim, including:
- Employer Credit for Paid Family and Medical Leave: This tax credit encourages small-business owners to provide paid leave to employees, including maternity/paternity leave, family health emergencies, or other reasons covered by the Family and Medical Leave Act (FMLA).
- Disabled Access Credit: This credit encourages businesses to make their locations accessible to customers with disabilities.
- Work Opportunity Credit: You may be able to claim this tax credit if you have hired employees from underserved populations, including veterans, family assistance or food-stamps recipients, ex-felons, etc.
…And more. Visit the IRS website for a full list of tax credits for businesses.
4. Write Off Your Vehicle
If your vehicle weighs over 6,000 lbs, you may be able to write it off up to a certain dollar amount.The IRS allows you to deduct expenses related to operating and maintaining your business vehicle per mile driven.
However, your vehicle must be used for business purposes. If you use it for personal use half the time, you can deduct 50% of the expense.
There are two methods of calculating car expenses:
- Using actual expenses, including repairs, insurance, tires, registration, gas and oil, etc.
- Using the standard mileage rate, which is currently 62.5 cents per mile.
5. Deduct the Cost of Gifts
Did you know that those client Christmas gifts are tax deductible? If you didn’t, you’re in for a surprise of your own: The IRS allows businesses to deduct $25 in gifts, per person, per year. This can apply to gifts you send to customers, contractors, vendors, and even freelancers.
Of course, you will need to keep records that prove the business-purpose of the gift, as well as the details of the amount spent, so save those receipts!
6. Time Your Business Income and Expenses
This business income strategy is known as accelerating or deferring your income. This is when a business owner tries to collect as many payments as they can before the current year ends (accelerating), or push their earnings into the next year (deferring).
For example, if you know that you’ll be moving into a higher tax bracket in 2023, you might accelerate your income so that more money is taxed this year, at the lower rate. But if you had an unexpectedly high income in 2022 and don’t want to be taxed at a higher bracket, you might wait to invoice your clients until January 2023, deferring that income to next year.
7. Write Off Bad Debts
If you use the accrual accounting method, you may be able to deduct bad debt from your business income to reduce your taxable income.
“Bad debt” is money that is owed by a client or customer that you as the business owner are unable to collect. According to the IRS, bad debt includes:
- Loans to clients and suppliers
- Credit sales to customers
- Business loan guarantees
At the end of the year, if these debts aren’t paid, you can subtract them from your business income.
8. Hire Family Members
It depends on the type of enterprise structure your business has, but in general, there are many ways in which hiring family members can be advantageous for your business.
Wages paid to children (under age 18) employed by a parent are usually not subject to taxes. These wages can also reduce the net income of the business. Furthermore, any income paid to the child is taxed in a lower tax bracket than that of the parent. This helps reduce the tax burden for the business.
If you are running a husband-wife partnership, an LLC that’s treated as a husband-wife partnership for tax purposes, or an S corporation, you can take advantage of the wage expense deduction. This deduction reduces your individual federal taxable income, your individual net self-employment income, and your individual state taxable income (if applicable).
9. Donate To Charity
An oldie, but a goodie: When you donate to charity, you can deduct that donation from your tax bill. By doing this, you’re investing in your community and in your branding, as your charity resonates well with customers. It’s a win-win for everyone.
According to the IRS, when you deduct charitable contributions of money or property, you may deduct up to 50 percent of your adjusted gross income, but 20 percent and 30 percent limitations apply in some cases.
10. Hire a Reputable CPA
Don’t you wish someone could just find all the tax breaks for you? A Certified Public Accountant (CPA) can do just that.
It’s a CPA’s job to make sure that you’re paying all the necessary tax obligations. However, they also work to leverage every tax break and tax credit that applies to your business, and reduce your overall tax bill. Furthermore, qualified CPAs have the knowledge and expertise to implement business income strategies that set you up for even more tax advantages in the future.
Want To Lower Your Tax Bill? Wood CPA Can Help.
At Wood CPA, we provide expert tax planning and preparation services for businesses in a variety of industries. And with our new business advisory services, we’re a one-stop-shop for all your business needs. Schedule an appointment with us to see how we can help you lower your tax bill this year!