Making these tax moves before 2023 could save you a lot of money.
- Small business owners should maximize their retirement savings and review their business structure before paying taxes.
- Keep track of all your expenses so you can deduct them at tax time.
- Expediting or deferring income to pay taxes when you’re in a lower tax bracket.
As a small business owner, it’s important to stay on top of the latest tax strategies so you can minimize your tax liability. One way is through tax planning. Tax planning is the process of identifying tax strategies to minimize your tax liability. With the new year just around the corner, now is a good time to review some of the key tax moves you should be taking ahead of 2023.
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1. Maximize your retirement savings
Not only will your future self thank you for saving for your golden years, but you’ll also save taxes in the process. There are several retirement savings plans available to small businesses, including SEP IRAs (Simplified Employee Pensions), SIMPLE IRAs (Employee Savings Incentive Matching Plans), and Solo 401(k). These plans offer significant tax benefits, including the ability to deduct contributions from your taxable income and defer tax on investment income until withdrawals.
The 2022 401(k) contribution limit is $20,500. For SEP IRAs, contributions are limited to 25% of net self-employment earnings (excluding your own contributions), up to a maximum of $61,000 in 2022. For SIMPLE IRAs, employees are allowed to make contributions of up to $14,000 from wages or more, excluding employer contributions. You can also contribute to a traditional IRA. The contribution limit is $6,000 (or $7,000 if you are 50 or older).
2. Review your business structure
Are you still using the same business structure that you started with? If so, it might be time to re-evaluate whether it’s still the best option for your business. For example, if you have grown significantly since starting your business, you may want to consider converting to a C corporation.
Before the Tax Cuts and Jobs Act (TCJA) of 2017, the top corporate tax rate was 35%. But the TCJA dropped it to 21%. This is significantly lower than the top rate of 37% for individuals. For LLC members in the highest tax bracket, a change in tax status can result in significant tax savings. It’s important to speak with a tax professional to help you determine the pros and cons for your situation.
3. Maximize your deductions
Make sure you are taking advantage of all available deductions. The first thing you should do when doing tax planning is to review your expenses and deductions. This will help you determine what expenses can be deducted, and how much you can deduct. Remember, you can only deduct the portion of expenses related to your business.
For example, if you use your car for business and personal use, you can only deduct the portion of the expense related to your business use. If you have a home office, you can deduct a portion of your rent or mortgage interest. Accounting software can help you keep track of your deductible expenses. Here are some common deductions that small business owners can take:
- Health Insurance Fee: You can deduct the health insurance premiums you paid for yourself, your spouse, and even your dependents.
- Marketing: Any money you spend on digital or traditional marketing, your website, conferences you attend, business cards you make, and other expenses that make people more aware of your business can be deducted.
- business insurance: Any liability insurance, workers’ compensation, errors and omissions, etc. are deductible.
- professional service: Hiring professionals to help you with marketing, business lawyers, accountants, etc. are deductible.
- Travel expenses: Any travel related to your business is deductible, so keep track of all your receipts and expenses.
4. Revenue Delay or Acceleration
Income is taxed in the year it is received. Depending on your circumstances, you can choose to pay higher taxes this year or next year. Why pay now if you can pay later? To lower your tax burden this year, defer any income until next year. For example, if you do business on a cash basis, you can send an invoice in January 2023. The money you receive will not be taxable until 2024.
But if you want to lower your taxes next year, get as much income as you can in 2022. Make sure you get all your bills by the end of the year. This may lower the income you report in 2023, when your income tax may be higher. If you think you’ll be in the same or lower tax bracket next year, it makes sense to defer your income. You don’t want to defer income if it could push you into a higher tax bracket. If this is the case, you may want to speed up your income this year so you can pay taxes in the lower tier now rather than later in the higher tier.
Tax planning is an important part of running a small business. By utilizing these strategies, you can minimize your tax liability and keep more of your hard-earned money. Keep up to date with the latest tax news so you can take advantage of any opportunities or deductions your business may have. Working with a tax professional can help you identify additional tax strategies to minimize your tax liability.
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