Tax planning for year-end is a crucial aspect for all businesses, especially for small business owners. Regardless of being a sole proprietor with no additional employees, the amount of tax you pay can be greatly influenced by the level of preparation and planning you devote to business tax management. Check out mid-year tax preparation tactics for small business owners for better business earnings. By preparing in advance and closely monitoring your taxable business earnings, you can exploit timely tax benefits, strategically handle your revenue and expenses and utilize tax deductions as a means to incentivize both yourself and your employees.
Here are four recommended strategies you can begin implementing for your small business tax preparation yet this year:
1. Asset Depreciation
Consider asset depreciation during your mid-year tax planning, as it allows for the gradual reduction in the value of assets over time. Examine your most recent purchases, such as equipment, trucks, computers, etc.—each of these purchases depreciates over time, and the amount can be deducted from your business income each year. By accounting for these types of depreciation, small businesses can lower their taxable income, resulting in reduced tax liability and increased cash flow.
Proper consideration of asset depreciation ensures businesses are compliant with the Internal Revenue Service (IRS) regulations, preventing potential penalties or audits. Therefore, understanding and strategically planning for asset depreciation is vital in optimizing tax savings and maintaining financial health for small businesses.
2. Business Tax Deductions
Understanding and utilizing available deductions such as startup costs, equipment purchases or research and development expenses can maximize your savings and preserve more of your hard-earned money.
Example: If you’re frequently investing in marketing efforts such as website design, advertising or purchasing promotional items, you can deduct these expenses at the end of the year. This includes all items necessary for production, such as cost of a photographer/videographer, editing expenses, rental space for shooting, props and more.
Advertising is a vital tool the majority of businesses utilize to spread the word about their offerings or services—better serve your business by investing in advertising tools while deducting the costs at the end of the year. Taking advantage of these deductions allows you to reinvest the saved funds back into your business, fueling its growth and success. Failure to capitalize on eligible deductions could result in unnecessary expenses, penalties or audits. Therefore, by considering and incorporating new business deductions into your tax planning strategies, you can optimize your financial position and support your business growth.
For more recommendations on potential deductions your business can exploit, speak with your tax professional for guidance.
3. Change in Business Entity Type: Sole Proprietorship
Developing a small business requires careful planning and preparation before laying the foundation. There is no one-size-fits-all approach, and each business has their own set of unique traits, characteristics and ways of conducting business. One of the most common routes of initiating a small business is through a sole proprietorship. According to census data, 76.2% of small businesses are sole proprietorships. This percent is relatively high, as starting up a sole proprietorship is more simple compared to other types of ownership. A sole proprietorship is a type of business structure where a single individual owns and operates the business. In this setup, there is no legal distinction between the business and its owner, meaning the owner assumes all liabilities and debts of the business.
Making a switch to a sole proprietorship can be beneficial for small business owners who are looking for an uncomplicated setup. So why should you consider switching?
- Establishing a sole proprietorship requires minimal paperwork to file and has low startup costs, making it easy to initiate.
- You have complete control over decision-making, allowing for quick responses to changing market conditions.
- A sole proprietorship simplifies tax reporting, as business income and expenses are reported on the owner’s personal tax return. However, it’s essential to consider your personal assets are at risk in case of business liabilities, and the business’s growth potential may be limited compared to other business structures like corporations or partnerships.
With every business type there are pros and cons. It’s important to understand your options before diving into a new system. If you are looking to pivot to a new business type, consult legal and financial professionals to assist you in making the best decision for your business.
4. Use Retirement Contributions and Bonuses to Reduce Tax Obligations
When tax planning, consider reducing your tax obligations by utilizing retirement contributions and bonuses. By offering retirement plans such as 401(k)s or Individual Retirement Accounts (IRAs) to eligible employees, your business can deduct the contributions made on behalf of the employees from its taxable income. This mid-year tax preparation tactics for small business owners is really beneficial. This not only benefits the employees by helping employees save for their retirement, it also allows the business to lower its tax liability.
Awarding year-end bonuses to employees can also be advantageous, as these bonuses are typically considered tax-deductible business expenses. By structuring bonuses effectively, small businesses can effectively lower their taxable income, ultimately reducing the overall tax burden. Both retirement contributions and bonuses not only incentivize and retain employees, they also serve as powerful tools in managing tax liabilities for small businesses. It is essential, however, to ensure compliance with applicable tax laws and seek professional advice to maximize these benefits. To begin implementing these types of incentives, seek professional guidance on best practices per your specific business set up.
Implementation Starts Here
Every small business has their own set of unique challenges and hurdles to overcome—save yourself the hassle of last-minute tax planning by being proactive now. By investing time and resources into these tax-saving tactics, you’ll be able to make use of timely tax benefits, strategically handle your revenue and expenses and utilize tax deductions as a means to incentivize both yourself and your employees. Our team of experienced Trusted Advisors are eager to speak with you and assist you on a new path with your needs top of mind. Reach out today to begin analyzing your tax preparation tactics before winter.