For small business owners, tax season presents a valuable opportunity to uncover potential savings. The right tax strategies can significantly reduce your business’s tax burden, allowing you to reinvest those savings into growing your company. Here’s a guide to practical, often overlooked methods to cut costs and maximize deductions this tax season.
1. Optimize for the Home Office Deduction
For those who run their business from home, the Home Office Deduction can yield considerable savings. The deduction allows you to claim part of your home’s rent, mortgage interest, utilities, and maintenance expenses if you use a specific area exclusively for business.
- Quick Tip: Use the simplified deduction method, which calculates based on square footage, or the actual expense method, which can sometimes yield a larger deduction.
2. Maximize Deductible Business Expenses
Everyday business expenses, from office supplies to digital software, are typically deductible. Advertising, marketing, and even some employee benefits are also eligible. Ensuring you capture every eligible expense is critical, as each deduction reduces your taxable income.
- Quick Tip: Keep digital or physical copies of all receipts for easy access and future audit protection.
3. Take Advantage of Employee Health Insurance Credits
If your business offers health insurance to employees, you may be eligible for the Small Business Health Care Tax Credit. Designed to help small businesses that cover at least 50% of employee health premiums, this credit can cover up to 50% of your contributions.
- Quick Tip: To qualify, ensure you have fewer than 25 full-time employees and meet other income eligibility requirements.
4. Claim Depreciation on Equipment
Depreciation allows you to deduct the cost of assets over time. Thanks to Section 179, certain equipment costs can be fully deducted in the year of purchase, while other assets benefit from bonus depreciation, which lets you deduct a significant portion upfront.
- Quick Tip: Work with an accountant to determine if it’s better to claim the full deduction immediately or spread it over multiple years for maximum benefit.
5. Don’t Miss Out on the QBI Deduction
The Qualified Business Income (QBI) Deduction allows many small businesses to deduct up to 20% of their business income. This deduction applies to pass-through entities, including sole proprietorships, partnerships, and S corporations.
- Quick Tip: Check eligibility based on income limits and business type to ensure you don’t miss out on this valuable deduction.
6. Capture Vehicle Expenses and Mileage
For business travel, vehicle expenses can be calculated using either the actual expense method (keeping detailed records of gas, maintenance, and depreciation) or the standard mileage rate set by the IRS. Each method has its own benefits depending on how much you drive.
- Quick Tip: Use a mileage-tracking app to simplify documentation and compare savings between methods.
7. Explore Retirement Contribution Deductions
Setting up a retirement plan, like a SEP IRA, SIMPLE IRA, or 401(k), is a powerful way to save on taxes while preparing for the future. Contributions to these plans are tax-deductible, reducing your taxable income for the year.
- Quick Tip: Contribute the maximum allowable amount before year-end to take full advantage of retirement-related deductions.
8. Utilize Charitable Contributions
If your business supports charitable organizations, you may be able to deduct donations or services provided. Monetary contributions and even certain property donations can help reduce your taxable income while benefiting causes that matter to your community.
- Quick Tip: Keep detailed records of contributions and any associated receipts, and ensure the organizations are registered nonprofits to qualify.
9. Review Changes in Tax Law
Every year, tax laws and regulations shift, with some changes particularly impacting small businesses. For example, the CARES Act and recent tax laws introduced updates to net operating losses and business loan interest deductions. Staying up-to-date on these changes ensures you don’t miss any new deductions.
- Quick Tip: Set a yearly tax planning meeting with a professional to keep current on all relevant tax changes and implement new strategies.
10. Take a Second Look at Inventory Management
Inventory costs often take up a large part of a small business’s budget, but you can optimize tax savings with smart inventory management. You may be able to write down the value of damaged, obsolete, or unsellable items, which can be counted as business losses.
- Quick Tip: Perform regular inventory checks and document losses for easy reporting come tax season.
Final Thoughts
By proactively implementing these strategies, you can cut your tax bill and increase your business’s financial flexibility. Taking the time to track eligible deductions, make smart investments, and consult with a tax professional will give you a head start in preparing for a cost-efficient tax season.