It’s not enough to increase revenues and profit margins. You also need to be taking advantage of all the current tax code has to offer.
With our top 7 small business tax tips and deductions secrets, you can save big this tax season. From deducting major purchases to obtaining R&D tax credits, there are many savings opportunities out there. At year-end, you might be pleasantly surprised at what expenses and assets you purchased for business purposes throughout the year can be used to deduct the total from your tax bill. Even donations to your favorite charity can help you lower your overall tax burden.
We always say to our clients:
It’s not what you make. It’s what you keep.
So, here are the top 7 small business tax tips and deductions you can use to keep more of what you make.
1. IRS R&D Tax Credits For Small Businesses
Research & Development (R&D) tax credits are lucrative for companies that undertake or sub out any design work. Specifically, manufacturing, construction, engineering, architecture, software, and tech firms can benefit significantly from these credits.
Eligibility for R&D tax credits typically requires a third-party outside of your CPA firm to complete a study. But the ROI makes these projects a worthwhile investment.
You can take the R&D tax credit every year. But you can also look back on the prior three to four years and reclaim unused credits, offsetting the taxes you’ve already paid.
The result? A nice, surprising refund you can reinvest back into your business.
Research & Development are lucrative for companies that undertake or sub out any design work. Specifically, manufacturing, construction, engineering, architecture, software, and tech firms can benefit significantly from these credits.
2. Employee Retention Tax Credits
The employee retention credit (ERC) is a fully refundable tax credit employers can claim if they keep employees on the payroll. The goal of the ERC is to help “severely financially distressed employers” bounce back from the financial fallout of the pandemic pandemonium and regain economic security.
In March 2020, the ERC became an extension of the Cares Act. When signed into law via the CARES Act, the Employee Retention Tax Credit was equal to 50% of qualified wages paid to employees from March 13, 2020, to December 31, 2020.
Congress recently approved and enhanced the employee retention tax credit rules. Business owners can claim up to $26,000 in refundable payroll tax credits per employee. Qualifications include revenue decline, capacity restrictions, supply chain disruption, commerce disruption, partial and full shutdowns, work-from-home orders, or vendor and customer restitution in 2020 or 2021 due to the Covid-19 pandemic.
Businesses and tax-exempt organizations operating in any calendar quarter of 2020 or 2021 can claim this credit if they meet certain criteria listed below.
- Had to fully or partially suspend business activities on account of a pandemic-related government order limiting commerce, travel, or group meetings due to COVID-19, but only during enforcement of the order.
- Any forced closures or quarantines resulted in a 20% or more significant decline in gross receipts for the business, compared to the same calendar quarter in 2019.
3. Business Entities Structure Planning
More often than not, entity structure is a major consideration for a company at formation. But it’s never looked at again as the company’s situation changes — along with the ever-changing tax code.
This results in substantial missed opportunities to optimize entity structure and minimize taxes. For example, C-corporations have the least flexibility in tax planning. As a result, they’re typically not the best choice in the current landscape.
The importance of entity structure choice is amplified when business owners consider their exit. In many cases, owners consider this too late and overpay their taxes significantly. Proper and timely planning allows for optimization of entity structure — for whatever the future holds. This is one of the often missed small business tax tips that more owners should take into account.
4. Balanced Compensation
There are many tax consequences when small business owners take money out of their business, whether it be W2 income, distributions, guaranteed payments, dividends, etc.
The nature of the qualified business income dictates income taxes and employment taxes the company and business owner pay.
The best strategy requires an analysis to determine the most efficient compensation structure that minimizes taxes. This can be completed throughout the year or during your end-of-year tax planning.
5. Accounting Method Changes: Accrual vs. Cash
The Tax Cuts and Jobs Act of 2017 outlined new rules for small businesses, defined as under $25 Million in 3-year average annual revenue. One of those rules allows companies more flexibility when it comes to how they report income and business expenses, such as health insurance or repairs made on your principal place of business.
Companies can elect to change methods that could provide a one-time significant deduction in the year of the change and ease in reporting going forward.
Before the Tax Cuts and Jobs Act (TCJA) of 2017, many small businesses were actually required to file taxes using the accrual method. That's where one of the best small business tax tips comes into play.
The TCJA dramatically increased the number of companies exempt from this requirement. It also laid out a process for companies to make an automatic change to their accounting method under the new rules.
For companies that are now eligible to switch to the cash method, the conversion could offer a large one-time tax deduction. This is heavily dependent on accounts receivable and accounts payable on the books, and how much has racked up through the years
6. Inventory Reporting
Like the accounting method changes, small businesses, independent contractors, and freelancers can look at different ways to report inventory on a tax basis using internal inventory policies.
This could allow for ease in reporting and a potential one-time deduction for expensing a portion of your inventory.
The IRS defines what to include in inventory. For example, if you manufacture a product, your inventory includes raw materials, work in process, finished products, and supplies that you incorporate into the finished products. Exclude other assets, sold goods still in your possession, goods consigned to you, and goods on order.
7. Cost Segregation
Cost segregation is a strategy for real estate owners, allowing for significantly accelerated depreciation deductions through the segregation of building components.
Depending on the type of building, you can look forward to anywhere from 20 percent to 70 percent of additional year-one depreciation through a cost segregation analysis.
The cost of a segregation study can more than pay for itself in savings on your tax bill. Tax experts analyze the money spent on construction costs or purchasing costs against depreciable assets that are classed as the owner’s property.
Generally, all components that can be treated as personal property are depreciable over five or seven years. Money spent on land improvements can be depreciated over 15 years. By accelerating depreciation on shorter-lived assets, you can make significant tax cuts. There is also bonus depreciation that can result in even more significant savings.
Get the best small business tax tips with Cunningham & Associates.
I love overpaying on my business taxes!
Said no business owner, ever. Take advantage of the above small business tax tips and you will achieve tax savings for your business.
Stop overpaying on your self-employment taxes today. We’re now living in the Golden Age of Taxation, where there are numerous instruments for lowering your tax burden as a small or mid-sized business owner.
While on it, make sure you’re claiming home office deduction by multiplying eligible home expenses by the square-foot portion of your home set aside for business use. Remember, it’s always the best idea to consult a tax advisor before writing off a business expense, such as insurance premiums, or sales tax.
In addition, work with your tax advisor from day one of opening your business, not just in March and April for tax season. Reviewing your estimated tax payments for the year and checking if there is a shortfall based on your anticipated year-end income will help you avoid a penalty from the IRS and state government.
Talk to a tax professional about how you can save on your taxes. Contact us today at Cunningham and Associates, and we’ll get you started with beneficial tax strategies tailored to your unique situation and business objectives.
