Running a small business is rewarding but challenging, especially when tax season comes around. With careful planning, you can take advantage of tax breaks, credits, and deductions specifically designed for small businesses, helping you keep more of your hard-earned revenue. Here’s a rundown of proven tax tips that can make a significant difference in your business’s bottom line.
1. Leverage Deductions for Office Space and Equipment
If you operate your business from a home office, you might qualify for the Home Office Deduction. This can include a portion of your rent or mortgage interest, utilities, and even home repairs that benefit your workspace. Similarly, if you’ve invested in new equipment—computers, desks, office supplies, etc.—you can deduct these as business expenses, often through Section 179 of the tax code, which allows small businesses to deduct the entire purchase price of qualifying equipment.
- Tip: Keep meticulous records of your business use of the home office space and equipment purchases. Track square footage used exclusively for business to maximize deductions accurately.
2. Claim All Eligible Business Expenses
From advertising costs and employee salaries to meals and vehicle expenses, you can claim many essential business expenses that are directly tied to the operation and growth of your company. Deductions for vehicle expenses, for example, can be claimed either by tracking actual expenses or by using the IRS’s standard mileage rate, whichever yields a better deduction.
- Tip: Use apps to keep tabs on receipts and mileage logs for easy reporting and to ensure you’re prepared for tax time without scrambling.
3. Utilize the Qualified Business Income (QBI) Deduction
One of the most significant tax breaks for small business owners is the Qualified Business Income Deduction, allowing eligible businesses to deduct up to 20% of their QBI. This deduction applies to sole proprietorships, partnerships, and S-corporations. It’s a huge opportunity, but it does have limitations based on income, industry, and filing status.
- Tip: Consult with a tax professional to make sure you qualify for the QBI deduction, and structure your income accordingly.
4. Take Advantage of Retirement Contributions
Establishing a retirement plan for yourself or your employees not only benefits your future but also provides current tax advantages. Contributions to a SEP IRA, SIMPLE IRA, or 401(k) are generally tax-deductible, allowing you to reduce your taxable income significantly. Many retirement plans also offer tax credits for small businesses to offset some of the start-up costs.
- Tip: Consider contributing the maximum allowable amount to your retirement plan by year’s end for an additional tax deduction.
5. Benefit from Health Insurance Deductions
Self-employed small business owners can deduct their health insurance premiums, including coverage for dependents and spouses, directly from their gross income. If you provide health insurance to your employees, you may also qualify for the Small Business Health Care Tax Credit, which can cover up to 50% of the premiums you pay.
- Tip: Review your eligibility for the Small Business Health Care Tax Credit if you have fewer than 25 full-time employees and pay at least 50% of their health insurance premiums.
6. Utilize Section 199A for Real Estate Investments
If your small business involves real estate, you might be able to benefit from Section 199A, which offers a deduction for income from rental property. This is especially beneficial for real estate agents or property managers operating as sole proprietors, partnerships, or S corporations.
- Tip: Document rental income and expenses carefully to ensure you qualify for this deduction. Keep detailed records of property repairs, maintenance, and upgrades.
7. Know Your Depreciation Options
Depreciation allows you to recover the cost of assets over time, offering ongoing tax savings as your business grows. Real estate, vehicles, machinery, and certain software are all eligible for depreciation. In some cases, you can take advantage of bonus depreciation, which allows for a large percentage to be deducted in the first year.
- Tip: Work with your accountant to select the best depreciation strategy for your assets, balancing short-term savings with long-term planning.
8. Employ Family Members
Hiring family members in your business can provide unique tax benefits. If you hire your spouse or children, you may qualify for tax deductions on their salaries, potentially reducing your family’s overall tax liability. In some cases, employing your child under 18 can save on payroll taxes as well.
- Tip: Ensure you follow legal requirements for family employment, setting appropriate wages and maintaining proper documentation.
9. Track and Deduct Business Travel
Business travel expenses, including airfare, lodging, meals, and transportation, are all eligible for deductions. Whether traveling for a client meeting or a conference, saving receipts for travel expenses can result in significant deductions.
- Tip: Save itemized receipts and ensure travel expenses are strictly for business purposes to qualify for deductions without red flags.
10. Stay Informed on New Tax Laws
Tax laws change frequently, and staying updated on recent changes can help you save. For instance, the CARES Act introduced changes impacting how businesses claim net operating losses and write-offs on some expenses. By keeping informed, you’ll ensure you don’t miss out on new deductions and credits.
- Tip: Schedule an annual review with a tax professional or accountant to discuss any recent tax law updates that might impact your business.
Final Thoughts
While tax season might seem daunting, these strategic deductions and credits can help reduce your tax burden and improve your business’s financial health. Remember, careful record-keeping and consulting with a tax professional are key to maximizing your savings. By implementing these proven tax tips, you can keep more of what you earn and invest in the continued growth of your small business.