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. Considering the economic challenges this year has brought, from inflation-related cost increases to ongoing supply disruptions, “This is an important year to think carefully about how your business may have changed,” says accountant Vinay Navani of WilkinGuttenplan. Whether you’ve had a banner year or struggled, year-end decisions on everything from income to expenses to equipment purchases could have a significant impact on your tax picture.
As you work with your tax advisor, consider whether the eight strategies below could help you this year and potentially farther into the future.
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 and increase this year’s expenses by paying some of the following year’s costs in advance, he advises.
2. 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.
3. 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 limits 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.
4. 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. Of course, the full remaining amount would be due by the IRS tax deadline in 2023. You can work with your accountant to estimate the tax due, so you can invest the difference and potentially be better prepared for the eventual payment.
5. See whether pass-through entity status could help reduce your taxes
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.1 Here’s an example of how it can work: If an S corporation has $100,000 worth of income and the ultimate state tax is $11,000, that amount is considered an expense, so that the S corporation’s income for federal tax purposes becomes $89,000. Thus, the business owners were able to receive a tax deduction and ultimately paid less federal taxes due to the PTE benefit. Ask your tax professional whether your state has a PTE provision.2
6. 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.
7. 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, 2022, you could be entitled to a federal income tax deduction for 2022. As the law currently stands, the benefit still exists for future years, adjusted for inflation. Because the deductions are intended for small businesses, they start to phase out at spending amounts starting at $2.7 million, ending at $3.78 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.”
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.
8. Make gifts to your family
Giving can not only help you fulfill your goals as a socially responsible business, but can also be tax effective. When it comes to giving to loved ones, the federal gift and estate tax exemption has more than doubled since 2017 to the current limits, meaning that far fewer individuals are potentially subject to federal gift and estate tax. But changes could be in store, Navani notes. The current high estate gift and estate tax exemptions will, at the end of 2025, revert to 2017 levels, indexed for inflation (approximately $6 million for individuals, $12 million for married couples), without Congressional action. It’s not too early to speak with your tax advisor about whether such changes could affect your estate plans, Navani says.
1 See IRS Notice 2020-75 (generally supporting tax benefits under state PTE provisions).
2 PTE provisions vary. Consult your tax advisor regarding the specific laws and related rules.
Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.