8 tax tips for small business owners
Discuss these ideas with your tax professional to potentially reduce your tax liability for this year and beyond
SMALL BUSINESS OWNERS ARE OFTEN LOOKING FOR ways to minimize their company’s tax liability. That may mean evaluating your company’s current financial performance and adjusting your tax strategy accordingly, taking advantage of tax-friendly pass-through provisions or setting up a retirement plan for you and your employees. “With changes in estate and gift tax exemptions coming soon, you may also want to consider ways of transferring more of your business out of your estate,” says accountant Vinay Navani of WilkinGuttenplan.
Whatever your situation, year-end tax decisions could have a significant impact on your tax picture now and for years to come. As you work with your tax advisor, consider whether the eight strategies below could help.
1. If it’s been a down year, consider deferring expenses and accelerating income
If your company operates on a cash basis for tax purposes and
- Your profits seem likely to be lower this year — and you expect your business to be more profitable next year — consider accelerating cash collection before Dec. 31 and delaying paying expenses until after the new year. Income you realize this year may be taxed at a lower rate, and deductions may be more valuable if your income is higher in the new year. "If you expect a net operating loss this year, keep in mind that you may be able to carry that loss forward to offset income in future years and potentially lower your taxes then," Navani suggests.
- If you’ve had an especially strong year and you expect your profits to be high this year, consider if you may be able to defer revenue recognition to the following year (depending on when you receive cash payment), and increase this year’s expenses by paying some of the following year’s costs in advance, he advises.
“For many owners, the business is not just their largest asset, it’s the one that’s growing fastest in value each year.”
2. Make gifts to your family
“For many owners, the business is not just their largest asset, it’s the one that’s growing fastest in value each year,” Navani says. The current high gift and estate tax exemptions are set to drop at the end of 2025 to the 2017 base level of $5 million for individuals, $10 million for couples (indexed for inflation). You may want to start considering now how to transfer some of that wealth to beneficiaries before the deadline arrives. Depending on your children’s ages, your vision for the business and other factors, you have plenty of options, Navani adds. For example, gifting non-voting shares to younger beneficiaries could move assets out of your estate now, without giving children a say in management before they’re ready. Yet enacting such decisions takes time, he cautions. So speak with your tax advisors soon about which approaches might make sense for your business and family.
3. Understand the tax implications of your remote-working employees
Offering remote work as an option may help business owners to retain key employees and cast a wider net for talented new ones. Yet as the practice morphs from a pandemic necessity to a permanent part of the business landscape, owners need to be aware of and plan for tax implications, Navani cautions. “Make sure you're compliant with all the payroll tax and state filing obligations,” he suggests, even if you relocate within the United States. If you relocate to another country, the situation may become more complex. “For example, if an employee relocates from New Jersey to India, the employer needs to understand the Indian rules and responsibilities imposed on the employer,” he says. Your tax advisor can help you sort through and meet these obligations.
4. Determine whether your business may qualify for different tax treatment
Many small business owners can deduct 20% of qualified business income in calculating their federal taxes — “but it’s not automatic,” Navani says. The deduction generally applies to income from “pass-throughs” (when owners pay taxes on business income themselves, rather than the business itself paying tax). However, the law does not generally allow the deduction for certain service businesses, such as legal, medical or accounting practices. Your tax specialist can help you understand which tax laws and deductions apply to your business.
5. Create a smart plan for paying taxes
The sooner you have an idea of your business’s general outlook for the tax year, the better prepared you are to prevent cash flow disruptions — either by putting money aside or arranging for a line of credit to pay the IRS. “Many businesses have faced higher costs due to inflation,” Navani says. “Thinking ahead about what they’ll owe next April could prevent them from facing liquidity problems at tax time.”
One possibility you may want to consider if you qualify: Estimated taxes can often be based on the prior year, so if you had a down year, you can pay a relatively low amount of estimated tax for this year to preserve cash flow. Make sure to pay at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller, to avoid any penalties. Of course, the full remaining amount would be due by the IRS tax deadline in 2024. You can work with your accountant to estimate the tax due, so you can invest the difference and be potentially better prepared for the eventual payment.
6. See whether pass-through entity status could help reduce your taxes
“If you’re an S corporation, be sure to speak with your tax professional about your state’s policies.”
Many states have enacted pass-through entity (PTE) taxes as an IRS-approved work-around to the $10,000 limitation on state and local tax deductions as part of the Tax Cuts and Jobs Act of 2017.1 Generally, a qualified PTE entity, such as an S corporation, partnership, or an LLC taxed as either of the two, can make an election to pay a PTE tax at the entity level on behalf of the owner’s/partner’s share of their qualified net income from the entity.
If the election is made and the PTE tax is paid, this will generate a tax deduction on the entity’s federal return, thereby reducing the taxable income reported on the owners/partners federal K1. Here’s an example of how it can work: If an S corporation has $1 million worth of income and the ultimate state tax is $60,000, that amount is considered an expense, so that the S corporation’s income for federal tax purposes becomes $940,000. Thus, the business owners are able to receive a tax deduction and ultimately pay less federal taxes, thanks to the PTE benefit. Additionally, the PTE paid will generate a tax credit to owners/partners that elect to participate in the PTE election and can be used to reduce their personal state income tax. It is necessary to check if your state has any limitations on utilizing these PTE credits. “Since 2017, more and more states have adopted these provisions,” Navani says. “If you’re an S corporation, be sure to speak with your tax professional about your state’s policies.”2
7. Set up — or add to — a retirement savings plan
Small business owners generally have several options for employer-sponsored retirement savings plans, including SIMPLE IRA, SEP IRA, 401(k), and profit-sharing plans. The plans differ in the amount the employer and employee can contribute, the investment options available, and the ease and expense of setting them up, among other factors. Small business owners may also set up personal IRAs for themselves.
With any plan, contributions you make for yourself and your employees may be tax-deductible. Small businesses may also get a tax credit to help defray the cost of starting certain retirement plans. For calendar year taxpayers, you generally have until the due date, including extensions, of the small business’s tax return to contribute funds to a retirement plan. But some types of plans must be established before the end of this year, or earlier during this year, to get the tax deduction. Ask your tax advisor. To learn how much you can contribute to your retirement plan, refer to our annual contribution limits guide.
8. Consider equipment deductions and green energy tax credits
If you buy new or used equipment for your company and place it in service before December 31, 2023, you could be entitled to elect to expense the purchase and claim a federal income tax deduction for 2023. As the law currently stands, the benefit still exists for future years, adjusted for inflation. The aggregate cost of property that a taxpayer elects to treat as an expense cannot exceed $1,160,000. Because the deduction is intended for small businesses, its starts to phase out at spending amounts starting at $2.89 million, ending at $4.05 million. When planning a purchase, consider your timing carefully, Navani advises. “If you’ve had a challenging year financially and envision better results in the year to come, you might consider holding off that purchase until the start of the year, giving yourself a potential deduction for next year, when your tax bill could be higher.”
But you’ll have to weigh that choice against other incentives favoring investing in new equipment now, he adds. Bonus depreciation, set at 100% in 2020 during the pandemic, is steadily dropping each year—from 80% in 2023 to 60% in 2024. “So, if you’re on the fence about buying a new piece of equipment, it could make sense to buy it now and get it set up and running before the end of the year in order to get that 80%.”
Now may also be a time to consider green improvements for your business. The federal Inflation Reduction Act, signed into law in August 2022, includes nearly $400 billion for clean energy tax credits and other provisions aimed at combating climate change. These include potentially thousands of dollars in tax credits for buying new or used electric or hybrid clean vehicles, installing residential energy property, and other steps. Restrictions apply, so check with your tax advisor on which credits might be available to you, Navani suggests.