Mid-Year Business Tax Planning Tips

Tax planning is a critical part of maintaining the financial health of a business. By taking advantage of available business tax write-offs, you can minimize your company’s tax burden and potentially save thousands of dollars.

Most small business owners are knowledgeable about their service or product, but may not be aware of simple measures they can take to save on their taxes. If the government provides an avenue for reducing business taxes, it wants business owners to use it. Here are some tax planning tips that can benefit Ohio businesses.

Keep Good Records to Maximize Deductions

Every dollar you can deduct from your business’s income saves on your taxes. But keeping track of every expense is a hassle, especially if, like many businesses these days, yours is short-staffed. If keeping records of expenses has historically meant stuffing receipts in a shoebox and sorting them out at tax time, it’s understandable that you might dread the process. In addition, the time and effort it takes might make deducting expenses simply…not worth it.

But by failing to deduct business expenses, you could be leaving a lot of money on the table when you file your business tax returns. The best course of action is to invest in a scanner for receipts and software that simplifies record-keeping. Not only does keeping digital records save space, your tax preparer will thank you when it’s time to prepare your returns.

Take Advantage of Section 179 Expensing

The 2017 Tax Cuts and Jobs Act (TCJA) increased the availability of deductions under Section 179 of the Internal Revenue Code (IRC). Section 179 allows a business owner to immediately deduct the cost of certain qualifying equipment as an expense rather than depreciating it over time. So long as the equipment was put into service in the current tax year, the business owner can elect to expense it.

The key word there is “elect.” A taxpayer can also choose to depreciate business equipment if doing so makes more sense. However, the election to expense the equipment is generally irrevocable, so discuss the choice with your business’s tax service before committing to a decision.

When you think of business equipment, your mind may turn to thoughts of machinery and trucks, but many things can qualify for Section 179 deductions, including certain software programs and improvement of non-residential real property used in a business, like security systems, fire protection, and HVAC systems.

Maximize Retirement Plan Contributions

Small business owners often need to be focused on the here and now where their business is concerned. Retirement may seem like little more than a distant dream. But putting away money for that seemingly far-away day in a 401(k) can help save on corporate, self-employment, and business taxes in the immediate future. Speak to your business tax professional to learn about your eligibility and any limitations on your contributions to a retirement plan.

Evaluate the Structure of Your Business

When you established your business, you selected a business entity such as a sole proprietorship, partnership, limited liability corporation (LLC), S corporation, or C corporation. That entity selection may have worked for your business at the time, but is it still the best choice?

Your choice of business entity can have an impact on the taxation of your business. For example, a small business structured as an LLC avoids the “double taxation” of a C corporation and can save on Medicare and Social Security taxes.

Consider Shifting Your Base of Operations to a Home Office

For certain types of businesses, operating out of a home office can be a source of significant savings. Not only can a business owner lower overhead, but they may qualify for the home office tax deduction. Be aware: simply taking your laptop home from the office and working at your kitchen table for a few more hours a week does not convert your home into a home office. There are some fairly specific rules that apply to keep business owners and others from taking wrongful advantage of this deduction.

That said, if there is a space in your home that you regularly and exclusively use for business, and the majority of your business is conducted out of your home, you may be eligible for a deduction that can save you hundreds or even thousands of dollars depending on your circumstances.

Plan to Defer (or Accelerate) Income

The cash method of accounting is popular among small businesses. This accounting method recognizes income when it is received by the business, and expenses when the business actually pays them. If your business uses the cash method of accounting, you may be able to use it to reduce your taxes.

Simply put: if you expect your business to be in a lower tax bracket in 2023, you may be able to arrange to receive income you are owed in that year, rather than in 2022, when you would be taxed at a higher rate. By the same token, if you expect the business to be in a higher tax bracket next year, you may want to accelerate the receipt of income if possible. Not every business has the ability to defer or accelerate income, but those that do may be able to significantly reduce business tax liability.

The Bottom Line

Learning to maximize business tax write-offs for your small business can yield large benefits. To learn more about business tax planning and business tax preparation, schedule an appointment today with the accounting and tax preparation professionals at Gudorf Tax Group.