What are the best tax-saving strategies for small businesses?
To help small business owners and entrepreneurs save taxes through legitimate and easy ways, we asked experienced entrepreneurs and financial advisors this question for their best strategies. From hiring family members to implementing HSAs, there are several simple ways that may help you save on taxes.
Hire Family Members
Hiring a family member is one of the best ways small businesses can reduce their taxes. There are a variety of options that the IRS allows for this. You can even hire your children to shelter your income from taxes. Income paid to your children has a lower marginal rate; sometimes, the tax is eliminated altogether. If your business is under sole proprietorship, your child's wages are exempt from social security and Medicare taxes. Just make sure that the earnings are justifiable for business purposes. Meanwhile, hiring a spouse would also reduce taxes since the earnings will not be subject to the Federal Unemployment Tax Act (FUTA).
Kris Lippi, I Sold My House
Account for Business Losses
Keeping track of business losses is a great way to reduce the amount of taxes you owe each year. Business losses can be deducted from income, in many cases lowering your business’ overall taxable income by thousands of dollars. This can save business owners far more money than just making deductions for items that may be considered personal, such as home mortgage interest or charitable donations.
Eric Blumenthal, The Print Authority
Track Your Travel Expenses
You can deduct more than airline tickets and mileage for your travel expenses. Many entrepreneurs are ramping up traveling again to re-energize their businesses and expand their knowledge within their industry. Luckily, you can write off most of your travel costs as long as the primary purpose of your trip is business-related. Along with airline tickets, rides to and from the airport and travel by car, railbus, and ferry are also deductible.
Accommodations and meals are deductible as long as they are for business. Lodgings are 100% deductible. And for 2021 and 2022, business meals are 100% deductible for the cost of meals provided by restaurants. However, nothing is deductible if the trip is a vacation in disguise. So be sure to keep detailed records of your travels and all expenses incurred so that you can back up your claims if the IRS decides to challenge them.
Chris Gadek, AdQuick
Consider All Expenses Such as Rent and Utilities
Expenses reduce your overall tax burden, so never forget to include all business-related expenses when filing. These expenses can include things like the rent you pay for your business space, which can add up to a lot each year. You can also have utilities like high-speed internet, so long as they are directly related to running your business. Properly account for these expenses as they can reduce your taxable income when filing.
Vanessa Molica, The Lash & Sugar Company
Hire a Reputable CPA
Hire a reputable, certified public accountant (CPA). There are many laws and intricacies associated with business taxes, and you don’t want to risk overlooking something important when it comes to your taxable account. You may be able to tap into health savings or write off a qualifying child care expense.
A professional CPA will have a built-in strategy to get your taxes done right regardless of your financial situation. In addition to ensuring you’re paying everything that’s due, there are many write-offs you may not be aware of that could lower your tax bill. Remember, CPAs don’t cost you money; they save you money.
Stephanie Venn-Watson, fatty15
Deduct Assets to Charity
One effective tax reduction strategy is donating and deducting assets to charity. Consistently donating benefits the charity and can benefit your business by showing your loyalty to the community and your brand's values. Pick a charity that resonates with your brand and community, and share more information about it with your customers. It's a win-win, resulting in more loyal customers for your business.
Ely Khakshouri, Retrospec
Track Every Receipt With Software
Thorough recordkeeping and receipt tracking are how small business owners take advantage of every possible deduction. Disorganization could mean you're paying far more taxes than you need to. However, adequately tracking hundreds of slips of paper can get tedious, messy and overwhelming, so small business owners should invest in software that keeps every receipt tracked, stored and organized. It'll be much easier to find proof of expenses come tax season, potentially saving you hours and hard-earned dollars. Catching every single deductible expense is the key to saving money, so invest in a piece of software that takes the burden of recordkeeping off of your shoulders.
Nick Drewe, Wethrift
Fully Utilize Your Retirement Plan Contributions
My advice for small business owners to save on taxes is to max out their retirement contributions. While this depends on how much your employees contribute, putting away as much as $58,000 in your 401(k) retirement plan is a smart move by the end of the year. Seeking professional advice is still recommended as it helps you determine your eligibility and limitations in your retirement plan contributions.
Georgia McBroom, Camper FAQS
Utilize Startup Deductions
If you just officially opened your small business last year, you can utilize a few deductions available only to aid new businesses as they navigate expensive startup costs. You could deduct up to $5K in startup costs and $5K in organization cost if your total startup costs were under $50K. If you spent between $50K to $55K, you could use a partial deduction reduced by the overage.
Samuel Devyver, EasyLlama
Structure Your Small Business as an LLC
Choosing the structure of your small business as a Limited Liability Company (LLC) can provide you with tax advantages, such as the pass-through. Your business income is passed to you as the owner and can be taxed on a personal income tax rate. You also avoid double taxation and save on Social Security and Medicare taxes.
Jeffrey Zhou, Fig Loans
Deduct Your Vehicle
Small businesses can write off the total cost of a vehicle weighing over 6,000 pounds (i.e., a sedan or light truck). If that's true for your transportation, you can write off up to $18,000. You also have to use the vehicle for business purposes; however, if you use the truck or van half for business purposes and half for personal use, you can deduct 50% of the expense.
Stewart Guss, Stewart J. Guss
Implement HSAs For Employees
One innovative and effective way for a small business to lessen its tax burden is to put aside money for future healthcare needs. As medical care gets more expensive, saving money for future medical needs is the wise decision to make – even if you’re healthy today. The best way to do this is to create a Health Savings Plan for employees. By implementing HSAs, businesses can reduce taxes and future health costs. Contributions are tax-free. Growth is tax-free. And when the time comes for you to withdraw for medical expenses, those withdrawals are tax-free.
Alan Ahdoot, Adamson Ahdoot Law
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Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.