Did you know that only half of all small businesses survive their first five years? There are a lot of factors that can lead to small business decline. However, one of the most common culprits is tax season.
If you don’t prepare for taxes as a small business, there’s a good chance you’ll end up paying more than you need to.
That’s why we made this article. In it, we’ll go over some important tax tips that every small business should remember. That way, you can save money and put it back into your business.
Keep reading to learn more.
1. Look Into Small Business Tax Credits
If you’re dealing with a large tax bill the first thing you should look at is tax credits. This is free money at the end of tax season. How do they work? You can reduce your tax liability dollar for dollar with any tax credits you have.
For example, let’s say you owe $10,000 in taxes. You find a tax credit that’s worth $3,000 for your small business. In the end, your tax bill will come out to $7,000.
We’ll go more into some specific small business tax credits later in the article. But, we encourage you to research the ones that apply to your industry. You never know what you might find.
2. Track Your Expenses
If you aren’t saving every receipt from business expenses, then you’re losing money each year on taxes. So, it’s time to start keeping a detailed spreadsheet of all the money you spend on necessary and ordinary business costs.
Better yet, invest in some good accounting software. As we’ll see later tracking your expenses is vital for deductions.
Receipts are important for deductions because they’re proof that you used the money on expenses that count toward deductions.
3. Don’t Worry About PPP Money
While the Paycheck Protection Program loans helped many small business owners during the pandemic it’s starting to cause many of them stress.
Some owners think that the money they received from the loan counts toward income.
The good news is that it doesn’t as long as you qualified for forgiveness. What’s more, any money from the loan that you used to pay for business expenses can still be deducted. Talk about a win-win situation!
4. Carryover Any Loses
It’s fairly normal for businesses to operate at a loss during the first two to three years. However, did you know that when your business does start to turn a profit you can use those previous losses to lower your overall small business taxes?
This is thanks to the net operating loss (or NOL) deduction. You subtract your revenue from your operating expenses.
Any money that’s left is your net operating loss which can be taken as a deduction from your income when you turn a profit.
5. Get Started On a Retirement Account
It doesn’t matter if you’re a self-employed solopreneur or you have employees, you can still benefit from a retirement account when doing taxes.
Specifically, you can get tax benefits on any money that you contribute to a 401(k) and IRA retirement plans.
If you’re self-employed, then look into a solo 401(k). Any contribution to these plans is tax-deductible. You’ll only need to pay income taxes on them when you start to withdraw them in retirement.
6. Take Home Office Deductions
During the pandemic, many businesses switched to a work-from-home dynamic. And, even now as the pandemic dies down many employers find that they prefer this style of work.
If you fall in this category, then you can deduct the portion of your home that you use as office space. The easiest way to do this is to measure the square feet of your office and multiply it by $5 (up to three hundred square feet).
Alternatively, you can have home office expenses and deduct 10% of them from your tax bill. However, this requires a lot more work.
7. Take Business Car Deductions
It doesn’t matter if your car is leased or owned. If you use it for your business, then it’s tax-deductible for company finances. Make sure that you’re keeping track of how many miles you drive on your vehicle.
Then, multiply it by the IRS mileage rate, which can change on a year-to-year basis.
Also, keep in mind that your daily commute doesn’t fall in this category. It’s referring to transportation needs like driving to clients and conferences.
8. Take Business Meal Deductions
Any business meals that you get can be deducted between 50% to 100% for the cost of food and beverages when filing taxes. What’s the catch? The food being used needs to be from a restaurant.
If you get a deli platter from a grocery store, then this will not count toward deductions. Thus, you don’t need to eat the food on the premise. You can pick it up for take-out.
9. Think About Changing Your Business Structure
Most small businesses fall under the pass-through entity classification. With this model, your business is considered one taxpayer. As such, self-employment taxes will take up 15.3% of your earnings.
However, you might be able to save money by reclassifying yourself as an S corp owner. That way, you’re just considered another employee.
If you want a non-pass-through option, you can consider the C corporation structure. But, the strict administration requirements might not make it viable for most small businesses.
10. Donate Anything You Don’t Use
It’s time to look around the office for anything you no longer use in your day-to-day business operations. Maybe your business went paperless recently and you no longer need a printer.
Or you have some office furniture that you feel like replacing. Anything that you donate is deductible.
All you need to do is donate it to a 501(c)3 nonprofit and use fair value accounting to determine your appraisal. If it’s in too bad of shape to be donated, then you can still claim it as a loss using Section 1231.
11. R&D Tax Credit
We discussed the importance of tax credits for small businesses early on in the article. Well, here’s one that you should be looking into. It’s not for every business.
But, if you’re in the process of developing new products, better processes, and improved formulas, then it can save you a lot. How much? Potentially hundreds of thousands of dollars if your company qualifies.
That being said, if you want to qualify, then you will need an engineering-based R&D tax credit study.
You can learn more about how to get this for your business here https://tri-merit.com/services/research-and-development-tax-credits/.
12. Healthcare Tax Credit
The value of the healthcare tax credit will ultimately depend on how small your business is. The smaller the business, the more money you can stand to save.
For example, if you have ten or fewer employees with individual wages that average under $25,000, then you can benefit the most from it.
Now sure if you qualify? You can see if you’re eligible by calculating on Form 8941. Also, if your business didn’t owe any taxes on the year you claimed it, then it can be carried over to the next year.
13. Get Accounting Software
Many people that want to save money use Excel spreadsheets to manage the taxes from their small businesses. However, be careful with this method. It’s easy to make a mistake when using a spreadsheet.
And remember if your tax returns are inaccurate because of an input mistake it can cause you a lot of headaches with the IRS.
Instead, consider investing in some of the wonderful accounting software out there. Not only does it reduce errors, but it also saves time and automatically creates financial reports for you.
14. Take a QBI Deduction
If you’re an entrepreneur, then you need to be taking advantage of the QBI deduction. Encourage self-employment it reduces your taxable income.
Specifically, it cuts off the amount of taxable income you owe by 20%. All you need to qualify for this self-employed tax deduction is to be a pass-through business. That’s it! No other work is needed.
Appreciate These Small Business Tax Tips? Keep Reading
We hope this article helped you learn some tax tips for small businesses. If you feel overwhelmed by all this information, then don’t panic. It’s normal to experience anxiety when you do your taxes.
However, as long as you follow the advice in this article, you’re off to a good start.
For more help, contact a tax professional that can give you specific advice. Did you appreciate this article? If you want to find more just like it, then keep on reading our website.