Many small business owners often think of taxes as a once-per-year sprint to file by April 15. However, taxes play a significant role in your business’s performance, and investing the time to strategize is well worth the effort. All the decisions you make throughout the year have consequences, and that’s why it’s essential to create a proactive strategy that will get you the most savings at the end of the year. Here are ten tax saving strategies that you can use before the year ends for maximum savings.
1. Contribute to Your Retirement
As a small business owner, you have three main options for choosing a retirement plan. With these plans, you’ll not only be saving towards your retirement but also reducing your tax liability – you can even qualify for the Saver’s Credit. Here are the three retirement savings options to consider:
- SEP IRA – If you’re a small business owner with a workplace of fewer than 100 employees, you can choose to make tax-deductible contributions for yourself and all your employees. However, only you can contribute, and the IRS sets limits based on your income and whether or not other retirement plans are available to you or your spouse.
- Simple IRA – As a business owner of any size company, you may also choose to make tax-deductible contributions for yourself and one or more of your employees. For this option, you and your employees can contribute to this account, and the IRS sets limits for the same.
- 401(k) – If you’re a business owner who wants to make tax-deductible contributions for yourself only, a 401(k) is a viable option.
2. Deduct Your Home Office
Small-business owners and entrepreneurs working from home could make huge savings on their taxes by taking advantage of home office deductions. However, you need to meet the IRS requirements and maintain proper financial records. Suppose you regularly use part of your home exclusively for business-related activities. In that case, the IRS allows you to write off the associated rent, repairs, utilities, real estate taxes, maintenance, and other related expenses.
You can determine the value of your home office deduction in two ways. If you choose the simplified option, you won’t deduct the actual expenses. Instead, you multiply the square footage of your space by a prescribed rate. For example, $5 per square foot for office spaces up to 300 square feet.
The standard and more challenging approach values your home office by measuring the actual expenditures against your overall residence expenses. It allows you to deduct mortgage interest, taxes, insurance, maintenance and repairs, utilities, and other costs. The IRS suggests Form 8829 to help you figure out the expenses you can deduct.
3. Go to the Doctor
If you’ve been in the hospital this year or had other costly medical or dental procedures, keep those receipts. You can generally deduct qualified medical expenses that amount to more than 7.5% of your adjusted gross income for that tax year.
For example, if your annual adjusted gross income is $20,000, anything beyond the first $1,500 of your medical expenditures (7.5% of your AGI) could be deductible. That means that if you spent up to $5,000 in medical bills, $3,500 of it could be deductible. You can check out the IRS Publication 502 for the full list of tax-deductible medical expenses.
4. Wait on Billing
Timing your income involves shifting it from one financial year to another. But first, you need to determine the year in which you anticipate to pay the most in taxes. Review your current expenses before the year elapses and prepay some of those expenditures if you want to reduce your income for the current year.
You can also wait on some bills if you think you might make less money in the next financial year. If that’s the case, hold on sending some invoices until January 1 to reduce your taxable income for the current financial year.
5. Contribute to a Health Savings Account
Both flexible spending accounts (FSAs) and health savings accounts (HSAs) allow you to put away pretax contributions for qualified medical expenditures that your insurance doesn’t cover.
To take advantage of an HSA, you must purchase a high-deductible health insurance plan, and you cannot have a disqualifying additional medical coverage like a general-purpose FSA. One notable benefit of HSAs is that you don’t need to spend all of the money in your account every year. The contributions roll over and grow tax-free to provide money for medical expenses the following year.
However, the funds you contribute to an FSA must be exhausted during the same plan year. While you can deposit funds into your HSA up to the tax filing due date in the subsequent financial year, FSA contributions are only added during open enrollment or the moment you join a new company.
6. Get Educated
You can take advantage of the American opportunity tax credit (AOTC) to bring down your taxes. AOTC is a credit meant for qualified education expenses paid for eligible students to cover the first four years of higher education. If the credit brings down the amount of tax you owe to zero, you can be refunded 40 percent of any remaining amount of the credit (to a maximum of $1,000).
The lifetime learning credit (LLC) is another credit for qualified tuition and related expenses paid for eligible students who enroll in an eligible educational institution. The IRS doesn’t place any limit on the number of years you can claim the credit, and you can gain up to $2,000 per tax return.
7. Invest in Your Children’s Education
By putting away some money into your child’s 529 education savings plan, you can present a tax-free gift to a beneficiary of any age. The IRS allows you to make a gift of up to $15,000 per beneficiary annually (which amounts to $30,000 from a married couple splitting contributions) without the need to fill out the federal gift tax form. Moreover, you can contribute up to five years’ worth of gifts.
You can use 529s to pay up to $10,000 of qualified higher education expenditures annually for the beneficiary’s enrollment. You can include expenses to public, secondary, private, or religious elementary schools or registered and certified apprenticeship programs without paying any federal income taxes.
8. Give to Your Favorite Charity
Whether it is cash or appreciated stock, any charitable gift is still tax-deductible if you itemize it. The same does not apply if you take the standard deduction. So, if you regularly give to charities, consider stashing several years’ worth of gifts into a single year’s donor-advised fund (DAF). That step helps increase savings, and you can still spread out the giving from the DAF over the next couple of years, depending on your charitable intent.
Even taxpayers who itemize may be allowed to deduct charitable cash contributions of as much as 60% of their adjusted gross income. And if you give items such as clothing or furniture, be sure to ask for receipts and itemize them at the end of the tax year.
9. Take Time to Review Your Deductions
As a small business owner, you can write off many expenses as tax deductions to reduce the amount you owe on your income tax. Take time to review available deductions on the IRS website and ensure that you’re taking advantage of all the ones available. Standard tax deductions to consider include:
- Business meals
- Work-related travel expenses
- Business insurance
- Work-related car use
- Home office expenses
10. Get Professional Tax Help
Tax planning is always a complex and time-consuming process. As a small business owner, you may not have time to investigate opportunities, so you should work with a qualified CPA to make the process seamless. Don’t wait too long, do it now before tax season begins.
If you have any questions or tips on tax-saving strategies, be sure to leave a comment below!