Small business always needs to minimize expenses and one way to do so is through proper handling of business taxes. Here are a few small business tax tips that could help you pay less come this tax season.
Qualified Business Income Deduction
Starting this year, many small businesses may qualify for a new federal tax deduction. However, it isn’t applied automatically and companies need to meet specific requirements.
The deduction applies to income earned by individuals in a pass-through service business such as a sole proprietorship, partnership, S corporation or limited liability corporation offering services such as accounting, medical, legal, and more.
Once single filers surpass income of $157,000 and joint filers surpass $315,000 they’ll pay less tax. However, single filers earning more than $207,500 and joint filers earning more than $415,000 do not qualify.
Create a C-Corporation
Despite the 20 percent discount, a C-corporation can offer more advantages to particular businesses. Discuss the implications with your attorney and tax specialist to discover which works best for your company.
Establish a Tax Plan
Planning for tax payments prevents cash flow disruptions. By dividing your tax burden into more manageable payments you avoid the large cash draw in April. Alternatively, your company can arrange a line of credit to pay the IRS fully and then include the smaller payments in your company’s budget.
Retirement Savings Plan Considerations
Owners can make personal IRA contributions, but they also have options for employer-sponsored retirement savings plans. These include a SIMPLE IRA, SEP IRA, 401(k), and profit-sharing plans. A defined benefit plan is often a good choice for small business as it allows greater savings than a 401(k) plan, and provides greater tax savings too.
Each plan offers various contribution limits, investment options, and contribution deadlines and some are easy to establish than others. Most times, contributions offer tax deductions. Additionally, small business may qualify for a tax credit to offset retirement plan startup costs.
Section 179 Equipment Deductions
Companies that bought new or used vehicles, equipment, machinery and computers before year-end may qualify for a federal tax deduction of up to $1 million. Deduction amounts diminish after an investment of $2,500,000 and the deduction ends at $3,500,000.
Additionally, some types of equipment placed in service after September 27, 2017 may qualify for 100 percent bonus depreciation deduction. Some equipment purchased before that day may also qualify for 40 percent bonus depreciation, providing it was placed in service in 2018.
Revenue & Expense Acceleration or Deferment
Companies that operate on a cash basis for tax purposes can defer revenue to reduce their taxable income if their profits were higher in 2018 than in previous years. Either bill late in the year, or delay delivering products and services until the following tax year.
Alternatively, companies that expect more profits in 2019 can delay paying deductible expenses until the new tax year.
Donating to charity is good for your company’s image and it often provides your business with a tax deduction equal to the fair market value of the property you donate. However, pass-through businesses can’t deduct charitable gifts if the owners deduct personalized items against state and local taxes.
Most business owners realize they can deduct office rental as a business expense. However, when a company forms a separate limited liability corporation, they can buy a building or workspace and then rent it to their business which provides a more significant tax benefit.
Business owners often choose to deduct vehicle expenses using the mileage driven for business. However, this isn’t always the most beneficial. Tracking the actual expenses for maintenance, fuel, etc. often leads to a bigger deduction. However, business owners must keep invoices and receipts and not just credit card statements.
Home Office Deduction
If you operate your business from home, don’t shy away from claiming this valuable deduction. It allows you to deduct a portion of your home’s utilities, insurance, maintenance costs, and more.
An office space qualifies when used exclusively for business and it is your principle business location. If you use the space to regularly meet with clients, it also qualifies whether it is in your home or a free-standing structure such as a garage.
While we can’t provide tax advice, we can save you money on your homeowners, business, and auto insurance. Always consult with a professional tax advisor to discover which tax strategies will work well for you, but call us for professional insurance advice.