Running a small business is no small feat, and tax season can bring on its fair share of headaches. Fear not, for we have compiled a list of tax-saving hacks to help you get the most out of your deductions and keep more of your hard-earned money. Read on for advice that any small business owner could use.
Home Office Deduction
Working from home? The home office deduction allows you to deduct a portion of your rent or mortgage, utilities, and other expenses related to maintaining your home office. To qualify, the space must be exclusively and regularly used for your business. Be sure to accurately measure the square footage of your office and apply the appropriate percentage deduction to your home expenses.
Real Estate Investing
For small business owners interested in investment opportunities, consider exploring real estate investment options. One tax-saving strategy is utilizing 1031 Exchange properties to defer capital gains taxes on the sale of investment properties. This allows you to reinvest the proceeds from the sale into a like-kind property and continue to grow your investment portfolio while potentially saving on taxes.
Vehicle Deduction
If you use your vehicle for business purposes, you may be entitled to a deduction. There are two methods for calculating your deduction: standard mileage rate and actual expenses. Track your miles and expenses diligently throughout the year to determine which method will result in the most substantial tax savings for your specific situation.
Health Insurance Premiums
If you are self-employed, you can deduct 100% of your health insurance premiums (and those of your spouse and dependents) as an adjustment to income. This valuable deduction can take the sting out of those high premiums, so don’t forget to include them in your calculations.
Section 179 Expensing
The Section 179 deduction allows you to immediately expense up to a certain amount of business equipment and software purchases, rather than depreciating the cost over time. For the 2021 tax year, the limit is $1,050,000, making this an attractive option for small businesses with substantial equipment and software costs.
Business Meals Expenses
Starting in 2021, the IRS allows a 100% deduction for business meals as a way to stimulate the restaurant industry. This increase from the previous 50% deduction is temporary, so take advantage of it while you can. Remember, meals must be with clients, customers, or employees, and the business purpose must be clear for the deductions to apply.
Retirement Plan Contributions
By establishing a qualified retirement plan, such as a SEP IRA, SIMPLE IRA, or 401(k), for your small business, you can deduct your contributions as a business expense. Not only can this save you in taxes, but it will also help you create a stable financial future for yourself and your employees.
Education Expenses
Furthering your education can help grow your business, and it can also lead to tax savings. Education expenses that maintain or improve skills needed for your business, or that are required by law to maintain your professional status, are deductible as a business expense. Just make sure they’re not for new skills or a new profession.
Tax Credits
Another way to save on your taxes is by taking advantage of tax credits available to small businesses. These credits, which directly reduce your tax liability, can be for a variety of activities, including research and development, energy efficiency improvements, and providing employee benefits such as childcare. Be sure to research and claim any credits applicable to your business.
Personal tax services can help you maximize available tax credits, reducing your liability and supporting your business’s growth. Consulting with a tax professional who understands these credits can provide invaluable assistance in ensuring you qualify, properly document your eligibility, and comply with tax laws.
Carryovers
Small businesses may experience net operating losses (NOLs), capital losses, or even charitable contribution deductions that exceed their income in a given year. The good news is that you may be able to carry these losses and deductions forward or backward to offset income in other tax years, lowering your overall tax bill.
Charitable Contributions
Not only do charitable contributions help support causes you care about, but they can also result in tax savings for your business. Most donations made to qualified charitable organizations are tax-deductible as a business expense. Keep thorough records of your donations, including receipts and any acknowledgment letters from the recipient organization, to support your deductions.
Properly Classify Assets and Expenses
Understanding how to classify your assets and expenses is essential for maximizing your deductions and avoiding mistakes that could trigger an audit. Be sure to familiarize yourself with the difference between capital assets, which are depreciated over time, and ordinary expenses that can be deducted in the current tax year. Proper classification can help you optimize your tax savings strategy.
Use accounting software to track and categorize expenditures and assets accurately. Many platforms offer features that can automate parts of this process and reduce the likelihood of errors. When choosing accounting software, prioritize automated data entry, customizable categories, built-in depreciation calculators, real-time reporting, and document storage. Also, seek tax compliance tools, multi-user access, integration capabilities, mobile accessibility, budgeting tools, and audit trails to enhance financial management and compliance.
Independent Contractors
To reduce employment taxes and administrative costs, you may want to consider hiring independent contractors rather than full-time employees. However, be cautious and adhere to the IRS guidelines for classifying workers, as misclassifying employees can lead to costly penalties.
Seeking Professional Help
Keeping accurate records and tracking every expense throughout the year may seem tedious, but it’s absolutely critical for taking advantage of all available deductions. And while this list can give you a head start, it’s always wise to consult with a tax professional who can provide personalized guidance tailored to your specific needs.
Choosing the right tax professional involves understanding your specific needs and ensuring the expert is qualified. Look for relevant credentials like Certified Public Accountant (CPA), Enrolled Agent (EA), or Tax Attorney, which indicate professional competence.
Consider specialists if your situation is complex, such as business or international tax issues. Verify their reputation through reviews and ask for referrals. Evaluate their experience, especially with cases similar to yours, and confirm their availability, especially during peak tax times.
Discuss their fee structure—whether it’s an hourly rate or a flat fee—and get an estimate for your particular needs. Interview potential candidates to assess their understanding of your situation and to gauge your comfort level with their communication style. Finally, check for any disciplinary actions and confirm their license status to ensure their professionalism and reliability.
Conclusion
By leveraging these tax-saving hacks, small business owners can maximize potential deductions and minimize their tax obligation. Stay proactive in your tax planning and seek professional help when needed to ensure you don’t miss any opportunities to save. Happy tax-filing.
