Tax Planning for Small Businesses

For small business owners, tax planning is crucial. Without proper planning, you may find a large portion of your hard-earned profits and savings eaten up by taxes that may not have been so high if you knew better options to pursue. To help you get started in tax planning for the new year, below are a few considerations to make.

Look Into a Tax Status Change

When it comes to small businesses, there are different ways to structure your business for tax purposes. Choosing the right option will depend on how profitable your business is and what personal tax bracket you fall into.

Sole proprietorships, partnerships, and S corporations are pass-through tax entities, with the profits being split among the owners based on their percentage of ownership. Their percentage of profits are then added to each of their personal tax returns, where taxes are paid.

C corporations do not function as pass-through entities and will pay the corporate tax rate on the profits directly from the company. Limited liability corporations typically operate as pass-through entities but can serve as a C corporation tax-wise if you file a Form 8832 with the IRS.² Since changing your tax status may affect your business and personal returns, it is wise to consult with a tax preparer before making a final decision.

Take Advantage of All Tax Deductions

It is imperative to know all of the tax deductions available for your small business and take advantage of those that will help reduce your small business tax liability. Qualified business income deductions are a significant tax advantage for pass-through entities, allowing you to deduct 20% of your share of the business income before paying taxes on the rest. You may also be entitled to a tax deduction if your small business falls under the specified service trade or business designation. Your tax preparer will discuss with you all the available tax deductions so you may determine which one will most benefit you.¹

Maximize Your Tax Credits

Tax credits are another way for small business owners to help reduce their overall tax burden. Understanding how to leverage these tax credits may allow you to pay less taxes at the end of the year for things you may already do in your business. The Work Opportunity Tax Credit will provide credits for hiring and retaining workers from certain groups. The Disabled Tax Credit provides additional credits for businesses that employ people with disabilities. You may also take advantage of tax credits for health premiums you pay for your employees.¹

Contribute More to Your Retirement Account

Retirement accounts are a great way to reduce your overall tax burden while saving money for retirement. If you already have a 401k plan set up for your company, you may want to look into how much more may be contributed before the end of the year tax-free. If you don't have a company 401(k) in place, it is an excellent time to consider starting one.¹