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10 Tax Tips for Small Business Owners You Can’t Afford to Ignore

Last updated 03/15/2024 by

Ben Luthi
Paying taxes is no fun, but unless you want to go to jail, it’s a part of life. You know what can make the process more satisfying? Figuring out ways to save money on your taxes. These 10 tax tips for small business owners will help you save big when tax season comes.
If you or your business are overwhelmed with tax debt, consider hiring a tax relief firm, such as Optima Tax Relief or NationStar Tax Advisors.
Several tax professionals weighed in to help us create this useful list, so you can save money on your business taxes this year.
Gail Rosen is a partner of the mid-sized CPA firm Wilkin & Guttenplan, P.C., and she has worked with both individuals and businesses for almost 40 years. She offers 10 important tips for small businesses when tax time rolls around.

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Tax Tip #1: Understand start-Up costs

tax tips startup expenses
“Small businesses are often not aware that any expenses which are incurred before the first sale are called start-up costs,” says Rosen.
Small businesses are often not aware that any expenses which are incurred before the first sale are called start-up costs”
“These costs cannot be deducted until the first sale. Then they are deducted over 15 years, and you can elect to deduct the first $5,000 in the first year of business. Many small businesses assume they can deduct all their costs in starting a new business, but they cannot until they have their first sale. Then costs are deductible based on the laws for that deduction.”
Rosen advises that you carefully evaluate whether you want to “hold” your start-up costs or elect to write off the first $5,000 in the first year of business. It depends on what year you expect to be in a higher tax bracket.

Tax Tip #2: Keep track of business expenses

Meticulous bookkeeping is key if you want to ensure you are aware of all of your business expenses for the year. Rosen explains, “For an expense to be deductible, it must be ‘ordinary’ and ‘necessary.’Track business expenses
So, if you spend money on office supplies, businesses dues, business publications, accounting fees for your business, business cards, business entertainment (50% deductible), gifts (limited to $25 a person a year), postage, printing, continuing education, computers, software, etc… it is a business expense and you should keep good accounting books to make sure you do not miss any of these expenses.”
Every deduction saves you a lot of money since a small business pays federal tax, state tax, and both sides of social security and Medicare because you are both the employee and the employer, says Rosen.

Tax Tip #3: Take the home office deduction if you can

Rosen emphasizes that the home office deduction is a valuable tax deduction. But remember, says Rosen, “The business space you deduct has to be used strictly for business purposes, and it usually will not work if you are renting an office elsewhere. The home office cannot be for your convenience.”
The IRS simplified the home office deduction and is giving you the option of using the “safe harbor” rule to calculate your home office deduction, explains Rosen. “You just multiply the square footage of the businesses square footage of your home * $5 per square feet to get your deduction.”
Rosen recommends making sure you have your accounting data in order so that you can compare the safe harbor method to the actual method to figure out which one generates a better deduction for you. “You can switch each year which method you choose for the home office deduction,” she explains.

Tax Tip #4: Evaluate standard vs. actual method for automobile deductions

One of these methods might be better for you, and it’s worth the time to see which one will reap the most benefits. However, keep in mind that there are restrictions on switching between methods after the first year.
Rosen explains the two methods:
Standard Method: In 2020, it is $0.58 per business mile plus tolls and parking.
Actual Method: Add up all actual automobile expenses and then multiply it by your business percentage (business miles/total miles for the year).
Note: Home office businesses have an advantage since the minute the business owner walks out of their home, the miles are deductible business miles. If you have an office you commute to, the office is not deductible.

Tax Tip #5: Make sure your accountant is doing a good job for you

Taxes for small businesses are complicated, and most times an accountant is needed to make sure you are filing correctly and taking all the tax deductions that you are legally entitled to. “Your accountant is a very important relationship,” says Rosen. “A bad accountant can be a big detriment to your business.”

Tax Tip #6: Postpone income and prepay deductions

Noel Dalmacio of Dalmacio Accountancy corporation offers additional tips for saving on business taxes. He says if you are expecting to be in the higher tax bracket this year, you can postpone your income by not issuing an invoice before year-end.
“Likewise, you can prepay and buy office equipment or prepay your rent up to 11 months. If you don’t have the cash, you can charge it to your business credit card. Credit card charges are deductible for tax purposes, even though you have not paid for it.”

Tax Tip #7: Contribute to your retirement plans

Money put into retirement accounts isn’t typically taxed until you withdraw it. So, to save money this year, put as much as you can into a retirement plan, advises Dalmacio.
“You can put in as much as $18,000 and an additional $6,000, if you 50 or over, on a 401-K,” he explains. “Also, you can contribute to a profit sharing plan up to 25% of your salary. Your overall contribution limit is $54,000 ($60,000 if you are 50 or over).”

Tax Tip #8: Shift income among family members

“You can hire your kids to work on your business. As a result, you are effectively shifting your business income to a lower tax bracket. However, make sure that you are keeping good records re: the time spent, nature of the job, and the legitimate pay-rate,” advises Dalmacio.

Tax Tip #9: Deduct medical insurance

Steven J. Weil, Ph.D., is president of RMS Accounting in Florida. He offers a few additional tips for business owners.
S-Corporation shareholders can’t deduct the cost of medical insurance paid by their Corporation if they own or are directly related to a 2% or greater stockholder, explains Weil.
He adds, “The good news is they can deduct 100% of the cost of medical insurance on their personal tax return, but to do so they must meet two tests: 1) The cost of said medical insurance must be included in their W-2 for the Corporation, and 2) The W-2 income must be greater than the cost of the health insurance.”

Tax Tip #10: Consider becoming an S Corporation

If you are not already incorporated, Weil suggests considering converting your business to a Subchapter S Corporation. “This will reduce your liability, give you more control over the FICA taxes you pay, enhance business credibility, and separate your business from your personal assets,” he says.
These tax tips for small business owners are only a primer of the steps you can take to reduce your tax liability. To start your business off on the right foot, review and compare the leading tax preparation companies now!

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Ben Luthi

Ben Luthi is a personal finance writer and a credit cards expert who loves helping consumers and business owners make better financial decisions. His work has been featured in Time, MarketWatch, Yahoo! Finance, U.S. News & World Report, CNBC, Success Magazine, USA Today, The Huffington Post and many more.

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