13 Tax Tips for Small Businesses

Tax deductions, credits, and compliance are some necessary things to manage taxes as a small business owner.

As a business owner, you are already involved in multiple business domains, but tax is one of the core elements you need to deal with. 

However, with the right approach and tax research tool, you can deal with taxes seamlessly without any hurdles.

In this blog post, we are going to discuss 13 imperative tax tips to help small businesses optimize their tax strategies and reduce liabilities. From understanding deductions to staying updated on tax law changes, these tips will help you navigate smoother tax seasons.

Key Takeaways:

• Tax deductions and credits: Understanding and maximizing tax deductions and credits can significantly reduce taxable income and tax payable for small businesses.
• Organized recordkeeping: Maintaining tidy records simplifies tax filing, substantiates deductions, and ensures compliance with tax laws.
• Quarterly tax estimates: Estimating and paying quarterly taxes helps manage cash flow and avoid surprises during tax season.
• Retirement benefits: Taking advantage of retirement account contributions provides tax savings and secures a financial future for small business owners.

1. Choosing the right business structure

Overview of business structures

Choosing the appropriate business structure is necessary for the success of your small business right from the start. Your selected structure will impact your taxes, legal liabilities, and overall operations. 

Factors to consider

Factors to consider when deciding on the right business structure.

• Consider your personal legal liability
• Evaluate the tax implications
• Assess the complexity of your operations
• Consider future growth and exit plans

Legal and tax advice

Choosing the right business structure involves legal and tax implications that can have lasting effects on your business. 

Seeking advice from a tax professional and legal advisor can help you navigate the complexities of each structure. They can provide valuable insights into the best structure that aligns with your business goals and minimizes your tax burden.

Get all your answers now with an AI Tax Advisor.

2. Mastering recordkeeping

Accurate recordkeeping

For small businesses, accurate record keeping is essential. It not only simplifies tax filing but also ensures compliance with tax regulations.

Keeping clear documentation allows for the proper reporting of income and deductions, minimizing the risk of errors and maximizing potential savings. 

Best practices

Best practices for record keeping include creating a designated process for organizing receipts, invoices, and other financial documents. 

Regularly reconcile accounts, categorize expenses correctly, and keep personal and business finances separate to maintain accuracy in financial records.

3. Maximizing deductions

Overview of common deductions

It's important to take advantage of the various deductions and credits available to ensure your business maximizes tax savings. 

Common deductions include expenses related to home offices, travel, meals, product or inventory costs, marketing, and even equipment purchases.

Detailed breakdown

Deductions are key in reducing your taxable income, ultimately lowering your tax bill. Understanding the specific deductions your business qualifies for can make a substantial difference in your financial picture.

Tip: Under Section 179, you can deduct the full amount of the equipment or machinery you purchase for your business instead of writing off that cost year to year.

4. Quarterly estimated taxes

Importance of quarterly payments

Not staying on top of your quarterly estimated tax payments can result in unexpected financial burdens. Business owners should estimate and pay their taxes quarterly to avoid cash flow issues and compliance penalties.

Calculation and payment

The calculation and payment of quarterly estimated taxes are based on the business's expected yearly income. The IRS requires most small business owners to make these payments if they anticipate owing more than $1,000 in taxes. The payments should be made throughout the year to avoid a large lump sum surprises at tax time.

Benefits of proactive tax management

Calculating and paying quarterly estimated taxes can help business owners stay financially prepared and avoid penalties. It also allows for better budgeting and planning, ensuring that funds are set aside for tax obligations.

5. Filing taxes on time

Meeting tax deadlines

Many small business owners can face penalties and fines for missing tax deadlines. On-time filing is a must to avoid these consequences and maintain financial stability. By staying organized and aware of key tax dates, businesses can ensure they file their taxes promptly.

Preparation tips

With tax season approaching, small business owners should start preparing early. Gathering all necessary financial documents, such as receipts, invoices, and payroll records.

Creating a checklist of tax obligations and deadlines can help businesses stay on track with their tax preparation process.

• Organize all financial records
• Research on the possible deductions and credits
• Consult with a tax professional

6. Deferring expenses and accelerating Income

Strategic timing

Despite the challenges small businesses face, strategic timing of expenses and income can significantly impact tax liability. By carefully planning the timing of cash collection and expense payments, businesses can optimize their tax situation for the current and future years.

Impact on tax liability

Any year-end tax decisions could greatly impact a business's tax picture. Accelerating income and deferring expenses based on expected financial performance can help maximize tax savings and minimize liabilities. Accelerating expenses and deferring income can also be a viable strategy depending on your anticipated tax bracket in the upcoming year.

It is important for small business owners to understand the timing implications for expenses and income. 

Net operating losses

Losses in a particular tax year can be utilized by carrying them forward to offset income in future years, thereby potentially lowering taxes in those years. 

7. Gifting to family

Gift and estate tax implications

To minimize tax liability, small business owners can consider gifting assets to family members. With the current high gift and estate tax exemptions set to expire at the end of 2025, transferring wealth to beneficiaries before the deadline can be advantageous. 

Tax implications and planning strategies should be carefully considered, using tax research tools like TaxGPT to navigate complexities and maximize benefits for both the business and the family.

8. Remote work and payroll tax obligations

Implications of remote work

One key consideration for small businesses with remote workers is ensuring compliance with payroll tax and state filing obligations. Staying on top of regulations is important, even if employees work from different locations.

State and international considerations

State and international tax obligations can become more complex when dealing with remote workers. For example, if an employee relocates to a different state or country, the employer must understand and adhere to the tax laws and responsibilities specific to those locations.

Learn more about the Taxes for remote workers.

9. Qualified business income deduction

Overview of the deduction

Qualified Business Income Deduction is a valuable opportunity for small business owners to deduct 20% of qualified business income when calculating federal taxes. This deduction applies to income from pass-through entities, providing tax benefits to eligible businesses.

Limitations and exclusions

Income limitations and exclusions may apply to the Qualified Business Income Deduction. Certain service businesses, like legal, medical, or accounting practices, may not qualify for the deduction. Additionally, high-income earners may face limitations on the deduction amount based on their taxable income.

10. Retirement savings plans

Types of retirement plans

Consider setting up a retirement savings plan for your small business. This can offer tax benefits and help secure your financial future. But for this, you need to understand the different types of retirement plans available.

• The Traditional IRA - Contributions may be tax-deductible depending on income level and retirement plan at work.
• The Roth IRA - Contributions are made with after-tax dollars, but qualified withdrawals in retirement are tax-free.
• The 401(k) or 403(b) - Employer-sponsored plans allowing pre-tax contributions and taxed withdrawals in retirement.
• SEP IRA & SIMPLE IRA - Designed for self-employed individuals, with contributions reducing taxable income.
• Solo 401(k) - For self-employed individuals, allowing for both employee and employer contributions.

11. Equipment deductions and green energy credits

Section 179 deduction

Take advantage of the Section 179 deduction, which allows businesses to deduct the full purchase price of qualifying equipment and software purchased or financed during the tax year. 

This deduction provides immediate tax relief by allowing you to deduct the full cost of the machinery or equipment from your taxes in the year of purchase rather than spreading it out over several years.

Bonus depreciation

An additional benefit for small businesses is the Bonus Depreciation, which allows for immediate expensing of new or used equipment purchased and placed in service before December 31, 2024, offering a federal income tax deduction for 2024. The deduction amount was 80% in 2023 and now 60% in 2024, so it may be good to invest now for businesses looking to buy new equipment while reducing their taxable income.

Green energy tax credits

Energy-conscious small businesses can explore Green Energy Tax Credits. The Federal Inflation Reduction Act 2022 includes around $400 billion for clean energy tax credits, which include incentives for purchasing electric or hybrid vehicles, installing energy-efficient equipment, and other eco-friendly initiatives. These credits can potentially provide significant tax savings while supporting sustainable business practices.

12. Separating business and personal expenses

Importance of separation

Business and personal expenses should always be kept separate to avoid financial confusion and potential tax issues. Mixing the two can lead to headaches and even legal complications. With proper separation, you can easily track your business expenses, report them accurately for tax purposes, and ensure compliance with laws.

Practical tips

Ensuring a clear separation between your business and personal finances is key. Use a dedicated business credit card to make all business-related purchases, keeping personal expenses entirely separate. 

Review and categorize expenses regularly to ensure accuracy and maintain organized records. Maintain a separate bank account for business transactions to streamline financial tracking.

Benefits of clear boundaries

One of the main benefits of maintaining clear boundaries between business and personal expenses is the ease of tax reporting. By keeping these two areas separate, you can accurately claim deductions, avoid potential audits, and overall ensure financial transparency. This separation also helps you establish good financial habits and maintain audit-ready records.

13. Staying updated on tax laws

Continuous learning

Small business owners need to stay informed about the ever-evolving tax laws to ensure compliance and take advantage of new benefits that may arise. Business owners can stay ahead by subscribing to tax newsletters, attending seminars, and regularly checking the IRS website for updates.

• IRS Small Business & Self-Employed Tax Center
• Small Business Administration (SBA)
• National Association for the Self-Employed (NASE)

Resources and tools

Small business owners can find it daunting to stay current with tax laws and find answers to their questions about updated rules and regulations. TaxGPT can be very valuable for them as their AI tax assistant, providing real-time updates, insights, and answers to all of their tax questions to prepare themselves for the tax season.