As a small business owner, every penny you earn counts. The more money you have, the more you can spend on expanding and growing your business.
But how can you save more if you’ve got heavy tax burdens? If you want to learn how to reduce your taxable income in 2024 effectively, we’re here to help.
In this blog, we’ll explore how you can lessen your tax liabilities using different tax reduction strategies. We’ll discuss the deductions you can make on your next filing and how to maximize them for savings.
Nine Tax Reduction Strategies for Small Businesses
There are plenty of tax reduction strategies you can use for your small business, like:
Make Write-offs
The simplest way to reduce your taxes is by making write-offs or deductions on your filings. Depending on the nature of your business, you are entitled to several tax deductions, such as:
- Home Office Deduction: This rebate is granted to small business owners who work from home. However, to qualify for this deduction, you must prove that your home office is used regularly and exclusively for your business.
- Qualified Business Income (QBI) Deduction: This deduction allows pass-through businesses like sole proprietorships and single-member LLCs to deduct up to 20% of their taxable income.
- Work-related Travel Expense Deductions: Any expenses you’ve made during a work-related trip can be deducted from your taxable income.
Before you include any of these write-offs on your filing, we recommend that you check if you’re eligible for them.
Invest in Equipment
Equipment is one of the biggest investments you’ll make as a business owner. Fortunately, you can write off any machinery you’ve purchased on your tax filings and get bonus depreciation.
Bonus depreciation is an accelerated business deduction that lets you offset a portion of your income to the equivalent of the equipment’s reduction in value. If you bought a truck earlier this year, you can deduct up to 80% of its price from your 2023 filing and the remaining 20% as a depreciation bonus the following year.
Now, you can claim this deduction in two ways: you can deduct them all at once or spread it out over several years. It’s also worth noting that there’s a limit to when you can claim this deduction, depending on your equipment.
For instance, you can only write off depreciation for cars and computers over five years. On the other hand, you can deduct depreciation for furniture and appliances for seven years.
Build a Retirement Plan
A retirement plan isn’t just good for your future; it’s also great for your business’s taxes.
According to this year’s tax codes, self-employed business owners can contribute up to $22,500 in a 401(k) created in 2023. Alternatively, if your retirement plan is set up as an IRA, you can add up to $6,500 to your account.
Small businesses that create 401(k)’s for their employees can write off up to $500 a year for each plan during its first three years.
Pay Your Debt
If you have any business loans you’re still paying off, you can write off their interest from your taxable income.
You’re eligible for this deduction if:
- You’re legally liable for the loan.
- You’re using the loan for business purposes, like buying new equipment or expanding your operations.
- You and the lender intend that the loan be repaid.
- There’s a true debtor-creditor relationship between you and the lender.
Is there a limit to what you can deduct from your loan interest? Yes. You can’t deduct any interest you’ll get from refinancing your business loan.
Pay for Your Employees’ Health Insurance
If you have a few employees and you’re paying for their health insurance premiums, you can offset some of these costs by claiming a tax credit.
To qualify for these deductions, you have to meet the following requirements:
- You must have less than 25 full-time employees.
- You pay an average wage of less than $58,000 annually per employee.
- Buy a group health insurance through the Small Business Health Options Program Marketplace.
- Shoulder at least 50% of the cost of coverage for each of your employees.
You can claim the credit for two consecutive tax years if you qualify.
Get Tax Credits
Tax credits are another strategy you can use to lessen your liabilities. What makes credits different from deductions is that they allow you to directly reduce the tax you owe.
Here are a few examples:
- Work Opportunity Tax Credit: This tax credit is granted to small business owners who hire employees from a targeted group facing certain barriers when searching for employment. Some examples of this include veteran professionals with disabilities, ex-felons, and more.
- Child & Dependent Care Credit: Child and dependent care credit is given to business owners paying for a family member’s child care or dependent care while working. This type of tax credit allows you to deduct 20-35% of your childcare expenses from your business’s taxes.
- Research & Development Tax Credit: Contrary to popular belief, R&D tax credits are not exclusive to researchers and scientists. This tax credit is available to small businesses actively developing or improving products through research and development.
Defer or Accelerate Your Income
Deferring or accelerating income is another common strategy business owners use to lessen their tax burdens. There are two ways you can defer your income.
First, you can delay sending your invoices to clients or extend their due dates until the new year.
For example, if you haven’t billed a client yet for your work last December 2022, you can wait until January 2023 to send the invoice. This way, your 2022 tax rates will be much lower.
The second way you can defer your income is through accrual-basis accounting. This approach is perfect if your small business doesn’t charge your customers until you’ve fulfilled your service.
However, it’s worth noting that there are strict guidelines you have to follow in accrual accounting. So, before you proceed, we recommend you consult a business tax solution specialist first.
Aside from deferring your income, you can accelerate it if you believe your tax rates will drastically increase next year. Alternatively, you can accelerate expenses if you’re in a high bracket for this tax year.
You can invest in depreciable assets like machinery or computers. You could also start creating 401(k) plans for your employees. Accelerating your expenses could help reduce your business’s taxes.
Donate to Charity
Donating to charity is another easy way you can reduce your tax liabilities.
Typically, you can deduct up to 60% of your adjusted gross income for charitable donations. However, there’s a 20% to 50% limit, depending on your contribution and the organization you’ve donated to.
For example, if you’ve donated property to a local synagogue, it will be calculated based on its Fair Market Value during the time of donation.
It’s important to note that your contributions can only be deducted if they go to a qualified organization, like charitable organizations, churches and religious organizations, and private foundations.
If you qualify for this deduction, you must track every donation you make. This way, you’ll have a much easier time itemizing them on your filing.
Your records should show how much you’ve donated to the organization and identify whether the contribution was made via cash or not. For donations over $75, you’ll need to get a written statement from the receiving organization.
Consider Changing Your Business Structure
Changing your startup’s business structure could be the most effective way to reduce your tax burden.
Your chosen structure determines your tax status. For example, if you structure your business like a Limited Liability Company (LLC), the IRS will treat you as a pass-through entity.
Pass-through entities don’t have to pay business income taxes. Instead, their net profit passes through to their owner’s tax returns. So, if you decide to incorporate your small business as an LLC, you won’t have taxes.
Instead, you’ll report any income or losses your business made in your individual tax filings.
Other business structures with pass-through tax status are sole proprietorships, partnerships, and S corporations. The best structure for your business will depend on your needs and goals.
Takeaway
In conclusion, as a small business owner, navigating the complexities of tax obligations is crucial for maximizing your earnings and fueling business growth. In this blog, we’ve delved into various tax reduction strategies you can use for your small business.
From leveraging deductions to making smart investments in equipment with bonus depreciation, these are practical steps you can take to optimize your tax position.
By proactively implementing these tax reduction strategies, you can make the most out of your hard-earned money. Remember, every penny saved through prudent tax planning contributes to the growth and success of your small business.
