The IRS Code is designed to offer numerous tax breaks to both individuals and businesses. Even the IRS admits that you must retain some money to live on and run your small business.
Some tax-saving strategies for small businesses, such as scheduling income and expenses, must be completed before the end of the fiscal year. Others, such as contributing to a retirement savings plan, can be completed at any time before filing your tax return.
If you’re looking for ways to lower taxes legally, here are some great tips:
When the Tax Cuts and Jobs Act (TCJA) went into effect in 2018, it established the Qualified Business Income (QBI) deduction. If your business is a pass-through entity—a sole proprietorship, a S corporation, or a partnership that passes its income and deductions down to its stockholders, affiliates, or owners to report on their personal returns—you may be able to deduct 20% of your qualifying business income.
Use Tax Credits
Tax credits are a way for the federal government to encourage individuals and companies to do things that benefit society.
For example, you can claim tax incentives for hiring people, incorporating environmentally friendly measures, giving access to disabled employees and the public, and providing employee health insurance. Most of these are part of the General Business Credit is extremely broad, so you may qualify under some of its terms. Consult with your accountant.
Businesses can deduct taxes on purchases of business assets, heavy equipment, vehicles, and, in some cases, real estate. These write-offs are sometimes available during the first year that you own and use the equipment. Section 179 exemptions and bonus depreciation are the two most common types of accelerated depreciation.
Section 179 deductions make it possible you to deduct the expenditures of certain assets as soon as they are placed in service. The maximum deduction grows each year and will be around $1 million in tax year 2022. Machinery, heavy equipment, buildings, automobiles, and other items may be eligible.
If your company uses the accrual accounting method, the end of the year is also a good time to evaluate your customer accounts. First, identify customers who are unlikely to pay you. To save taxes, you can start writing off the amounts people owe as “bad debts” and subtract them from your business income. Debts owed to clients, vendors, or staff members who do not pay you back are also examples of bad debts.
Consult a tax expert before taking any action that may have an impact on your business’s tax filing or spending a fortune solely for the purpose of reducing taxes. Make sure you choose someone who can assist you throughout the year, not just during tax season. Probably hire an expert to represent you in front of the IRS if you are ever audited.
An enrolled agent may be your best option. The IRS has designated these professionals as such because they have passed a rigorous three-part test or have previously worked for the IRS.