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5 Income Tax Strategies Every Small Business Owner Should Know

April 6, 2022

We believe strongly that small businesses are critical to our nation’s economy; in fact, 99.9% of businesses in America are defined as small businesses. And if you’re one of the millions of small business owners in America, you know how hard it can be to run your own business. One of the ways we can support you is by assisting you in reducing your tax burden. We’ve rounded up some of our best income tax strategies that small business owners can use to help them succeed.

Of course, every business and financial situation is different, so be sure to if you’d like more personalized tax advice and strategies to support your business. 

1. Accelerate or Defer Cash Collections

One of the first things you should do to prepare your tax strategy is to analyze your profits. Do you expect to have more profits this year or next?

If you project your profits next year will be more than the current year, you can accelerate your cash collections. When you bill your customers so their payments are received before the end of the year, you will realize those profits on the current year’s tax return. You only want to do this if you will remain in your current tax bracket. Be sure to pay attention to where you are so that you don’t get bumped into a higher bracket by building in more profits this year, which could offset any savings.

Alternatively, if you expect that your profits will be less next year, you can bill clients as close to the end of this December as possible. That way, it’s likely those payments won’t be received until January and the next calendar year. The outcome is that you will keep your taxable profits lower in the current year and then defer the payment of the tax caused by those profits to next year.

2. Accelerate or Defer Deductible Expenses

To really boost this strategy of deferring or accelerating profits, smart business owners will use it with their deductible expenses as well. You can reduce your taxable income in the year you believe you will be more profitable, by either paying or delaying costs to offset the income.

Let’s use an example to illustrate. If ABC Company expects profits to be higher next year compared to this year, should they wait until next year to charge deductible expenses?

Yes! When they wait until next year—defer those expenses—they will have more expenses to offset increases in income.

But, XYZ Company is facing a different situation. They expect their profits to be lower next year, so they should charge deductible expenses THIS year to offset this year’s profits.

Take note: credit card payments are deductible in the year they are charged rather than the year they are paid. 

Running reports to determine your company’s current-year profitability and project the next year’s profitability can help you make informed decisions that can decrease your overall tax bill. 

3. Set Up an Employer-Sponsored Retirement Savings Plan

Have you set up a 401(k) plan for your employees? If not, there are affordable options for companies of all sizes. Not only is a 401(k) plan an important benefit to help attract top talent, there are advantages for your company as well. 

Tax credits outlined in the SECURE Act of 2019 are available to small businesses to help cover some of the costs of starting a 401(k) plan, and could cover up to 50 percent of the expense. Contributions you make into these plans for your employees are likely tax-deductible as well.

As a business owner, you can contribute up to $20,500 of your own salary to your company’s 401(k) plan, which could put you in a lower tax bracket personally, and help you owe less tax.

4. Make Additional Contributions to Your Employees’ Retirement Savings Plan

To lower your business’s tax burden, you could also make additional contributions to your employees’ 401(k) plans. As an employer, the matching amount you make to your employees’ retirement savings plan usually qualifies as a business expense and is tax-deductible up to the annual deduction limit company-wide. The deduction is allowed for profit-sharing programs, too. These additional contributions can help you lower your tax bill and reward employees for their hard work. 

5. Charitable Contributions

The benefits of charitable activities go well beyond lowering your tax burden. Charitable contributions support your role as a good corporate citizen in your community as well as provide a way for your employees to contribute to the greater good. But small businesses can also get a tax deduction, just as individuals can, by donating property or cash to a charitable organization. 

As with your cash collections and expenses, if your projections show that you will have higher profits this year, you can schedule charitable donations for the end of the year to offset those profits. Some states even have “giving days” set up near the end of the year that may help match donations from large donor funds. Look into your state’s giving days to make your contributions go even further. 

There are many effective income tax strategies for small businesses that can still be implemented before the tax filing deadline. Give us a call at 203-489-5362 or schedule an appointment to learn how we can help your small business with smart income tax strategies that will make the most of your assets and plan ahead to minimize your tax burdens.

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