July 17, 2024

Tax Planning for Small Business Owners – Year-Round Strategies for Savings

As a small business owner, you may be searching for ways to reduce your tax liability. From home office deductions and retirement contributions, to expenses savings strategies – there are plenty of effective strategies you can implement all year-round to do just that.

One way to reduce taxes is to defer income. One effective strategy for doing this is running an accounts receivable aging report and writing off any uncollectible debt prior to year-end.

Defer Income to the Next Year

Deferring income can help your small business save money in terms of tax planning. Whether self-employed or employed by a corporation, delaying income such as bonuses, dividends distributions or payments for services until next year to lower your tax bill and decrease the total owed.

Most businesses utilize the cash method of accounting to record financial transactions, which means income is recognized when received while expenses are recorded when paid for. You can accelerate deductible expenses by sending invoices out earlier or making major purchases prior to year end.

Deduct bad debts and research and development expenses to lower your tax bill, but before doing so it’s advisable to speak to a tax professional first – they will recommend effective strategies tailored specifically to your circumstances and review contributing options to a retirement plan as they could help avoid higher taxes in future while strengthening company finances.

Accelerate Collections

Your accounting method could allow you to accelerate invoice collection before the year-end and decrease taxable income, helping offset taxes owed next year. This strategy is especially advantageous for small businesses using cash accounting.

Charitable contributions are another great year-end tax planning strategy that can lower your adjusted gross income and lower overall tax burdens. For more information about making donations to charity, you can visit the IRS website.

Saving for retirement can help reduce taxable income and ensure future financial needs are taken care of. No matter if you’re self-employed or an employee-sponsored plan like 401(k), saving early is key – the IRS offers more details here on retirement savings, while qualified accountants can assist in setting up tax-deductible retirement accounts with accurate estimates, timely paperwork filing and reports filed, as well as maximum deductions.

Purchase New Assets Before the End of the Year

Tax planning requires reducing your adjusted gross income. One strategy to help achieve this goal is accelerating any unnecessary purchases such as equipment or software before year’s end; this can help offset taxable business income and avoid being placed into higher tax brackets.

Another way is taking advantage of any business tax credits you might qualify for, such as energy-saving upgrades and vehicle depreciation deductions. Review the IRS list of credits to see which ones apply directly to your company.

Putting off hiring new workers until after year-end may reduce taxes; just make sure not to overspend – hire staff only when they fit your business well and do not overspend. Also keep in mind that certain professionals (e.g. accountants or tax preparers) will likely become overwhelmed with requests come early spring; make sure to reach out during off-peak periods like December.

Invest in Receipt Tracking Software

Maintaining accurate records of business expenses is vitally important to any small business owner. Without an accurate accounting of revenue and expenses, businesses may struggle to claim tax deductions or document income correctly, while also making more informed financial decisions which can increase profits and increase their bottom line.

Investment in receipt tracking software can significantly cut down the time spent creating and submitting expense reports, positively affecting employee morale and company culture in turn.

Businesses of all kinds can gain substantial tax savings by structuring as a limited liability company (LLC). An LLC allows for pass-through income, with net profits being distributed directly to owners at personal income tax rates of up to 37% – providing significant tax advantages both new and established businesses alike. To learn how you can incorporate this strategy in your own ventures, contact a professional tax advisor immediately.