Taxes are an important aspect of running a business. You need to be aware which taxes to pay and when they are due. It can be overwhelming, but planning ahead can help you file on time and claim the right deductions. Here experts share the most effective business tax saving tips you can try.
Below are the top 27 tips to save on business taxes, straight from the pros:
1. Don’t Put the Tax Cart Before the Business Horse
Jennifer Correa Riera, Tax Attorney, Fuerst Ittleman David & Joseph
Business owners often get bogged down on tax issues and lose sight of their main objectives, sometimes to the detriment of their businesses. For instance, business owners may relocate to tax incentive jurisdictions only to later discover administration and compliance costs, as well as audit risks, that wipe out the tax savings. Likewise, businesses may engage in transactions that lack economic substance, but that result in a beneficial tax treatment.
As an example, business owners may classify equity contributions as loans in an effort to make their distributions tax exempt. But if the substance and form of the transaction are inconsistent, it may trigger scrutiny by the IRS, an audit, and litigation. It is thus critical for businesses to structure and execute (with the help of a tax professional) efficient tax plans that holistically consider the business’ objectives together with available tax incentives and deductions.
2. Register Your Business as an LLC
David Brooks Sr., Founder & President, Retire SMART
Many small businesses make the mistake of thinking they are “small” and don’t understand the importance of choosing the correct corporate entity. There are several sole proprietors who could benefit tremendously by becoming an LLC. This can potentially eliminate some of the self-employment tax as well as provide other tax benefits, especially since the new tax law was passed.
3. Make Use of Tax-Deferred Retirement Plans
Samuel V Hicks, CPA, MST, Stern, Kory, Sreden & Morgan
The best proactive tax savings tool available to business owners today is retirement plans. No other expense allows owners to claim a deduction without having to give up the money spent for the tax benefit. The money usually has to be kept in a retirement account until certain age thresholds are met, but the growth on the funds is tax-deferred until a distribution is taken.
4. Take Advantage of IRC Section 179
Steven R. Dorfman, CPA, Managing Partner, Dorfman & Company LLP
Section 179 of the IRS code allows businesses to deduct the full purchase price of equipment and/or software in the year of acquisition up to $1,000,000. This means that the cost of personal property that is typically depreciated over seven years can be fully deducted up to $1,000,000 in the year purchased. It doesn’t it make sense to buy furniture and equipment that you don’t need to get this deduction. But if someone is planning on buying in the next few months anyway, they may want to consider accelerating the purchase prior to year-end to get the deduction this year.
5. Stay Up-to-Date on Tax Law Changes
Michael Law, CPA, Canopy
Some tax changes, like the Tax Cut and Jobs Act, were very taxpayer favorable. However, there are other tax changes that are not so favorable. Being aware of the tax changes and how they might affect your small business is critical to making the right decisions that can help you during the year and also in preparing the return.
6. Take Advantage of Bonus Depreciation
Willem Veldhuyzen, CEO, Rapid Filing Services LLC
If you obtain a business property and place it into service after September 27, 2017, and before January 1, 2023, your bonus depreciation percentage increases to 100%. Also, vehicles in service after December 31, 2017, can claim the maximum depreciation of $10,000 for the first year (or $18,000 under the 100% bonus depreciation).
7. Claim a Home Office Deduction if You Work from Home
Charles Corsello, EA, President & Co-Founder, C&V Enterprises, LLC
If you work from home, taking a home office deduction is one way to actually save on taxes for your small business. It applies to renters and homeowners, but you need to meet certain IRS regulations. First, the office space or room in your house must be used regularly and exclusively for conducting business. For example, if your kids use the same room to watch TV, it will not qualify. Second, it should be your principal place of business. Even if you conduct business outside your home, but you use your home office substantially and regularly to conduct business, you may still qualify.
8. Make Use of IRC Section 170(e)(3)
Gary C. Smith, President, NAIER
If your company sells goods of any kind, you should know about Internal Revenue Code Section 170(e)(3), which offers a generous but little-known tax benefit to C corporations. It has the power to turn a chronic corporate liability—surplus, obsolete inventory—into a sizable financial asset in the form of a legitimate tax deduction. Right now, Internal Revenue Code 170(e)(3) is one of the best-kept secrets of corporate tax law. But if every C corporation took advantage of it, it would revolutionize the way corporate America disposes of unprofitable inventory while making nonprofits infinitely more effective in helping the needy.
9. LLCs Should File an S Corporation Tax Election Form 2553
Dustin Ray, Business Development Leader, Incfile
If your business is an LLC, you could significantly reduce the amount of tax you pay by filing an S Corporation Tax Election (Form 2553). This form tells the IRS to tax your LLC as an S corporation, which reduces the amount of income you would need to pay self-employment taxes on.
Let’s say your business brought in $120,000 in revenue this year: $90,000 in profits and $30,000 in expenses. With a standard LLC tax arrangement, you would pay self-employment tax on all $90,000. Since self-employment tax is approximately 15%, you would owe $13,500. If you instead choose to be taxed as an S corporation, you could say your salary is $50,000 and pay standard payroll tax on that amount, totaling $7,500. The other $40,000 out of your business would be a distribution, and you would not pay any payroll or self-employment tax on the distribution, saving you around $6,000.
An S Corporation Tax Election is one of the best ways to save the amount spent on taxes as an LLC, yet it’s a little-known tip that many business owners are not even aware of.
10. Buy Captive Insurance
Anthony E. Parent, Esq., Founding Partner, Parent & Parent LLP
One of the most overlooked ways for businesses to save on taxes is also one of the best asset protection moves a company can make, and that is getting a Captive Insurance. How it works is a company will create its own insurance—this is called the “Captive.” The premiums paid to the Captive is a tax deduction for the company, but not income to Captive. What this does is not just allow indefinite deferral of earnings, but upon succession of the Captive, the money will be taxed—but at lower dividend rates. There are newer products out there for the smaller business, but you typically need to have earning of at least $500,000 and revenue of at least $2,000,000 for a Captive to make sense because there is a bit of compliance and tax work to do.
11. Take Advantage of the New IRC Section 199A
Tatyana Bunich, President & Founder, Financial 1 Wealth Management Group
For business owners, the most important tax move you can make is to look at section 199A in the new tax law. It’s the most significant change for business owners that most people are not aware of. Self-employed business owners, or any other entity where it’s a pass-through, will all qualify for this deduction. Ahead of year-end, taxpayers can set up pension plans to reduce their income, which will make them eligible for the 20% tax deduction This deduction could amount to savings of over $100,000 in taxes.
12. Keep Your Records Organized
Derek Carter, CPA & Chief Solutions Officer, Ceterus
Don’t lose time running your business in January and February by scrambling to get your books and receipts together for tax preparation. Get organized now and stay organized. Clean books and detailed supporting documentation will ensure you take advantage of all tax incentives and avoid late filing penalties, and will keep your tax preparer fees down.
13. Hire Independent Contractors Instead of Full-Time Employees
Steven G. Albert, CPA, Managing Director – Tax Services, Glass Jacobson Financial Group
The benefit to having independent contractors instead of employees is that you can hire them for work based on your needs, so during times you don’t require much labor, you do not need to keep them around. You also can exclude them from your employment costs, such as Social Security and Medicare taxes, company retirement plans, and other employee benefits such as medical, life and disability insurance, and vacation or holiday benefits. There are some legal requirements that you need to abide by, so you’ll need to make sure you stay in good legal standing by looking at the IRS’ website.
14. Use an App to Help Organize Your Business-Related Trips
Jolene Rheault, Owner & Founder, Refresh Marketing
You can deduct business-related driving expenses to help your business save on taxes. Using an app that helps organize your business trips is a great way to do this. There are different available apps, such as DriveDollar, which can help organize your trips to see which ones are deductible.
15. Know All Deductible Expenses Your Business Can Qualify For
Anthony J. Viola, Partner, KVLSM LLP
All businesses are always looking for ways to minimize their tax obligations by taking advantage of all business deductions that are allowable by the government taxing agencies. Make sure to know all deductible expenses that are directly attributable to operating your business and don’t forget to include them when filing.
16. Reduce Your Personal Taxable Income Through Retirement Plan Contributions
Diana Fitzpatrick, Legal Editor, Martindale-Nolo
One of the easiest ways for business owners to reduce their personal taxable income is through retirement plan contributions. These contributions reduce personal taxable income, which means owners who are close to or above the thresholds can try to get back below the threshold by contributing to their retirement plans. By doing so, they can then qualify for the full 20% deduction on their qualified pass-through business income.
17. Take Advantage of IRC Section 1202 if You’re Selling the Company in 5-10 Years
Tom Wheelwright, CPA, CEO, WealthAbility
If you are planning to sell your company within five to 10 years, you may want to consider converting your company to a C corporation to take advantage of the Section 1202 gain exclusion. Section 1202 allows you to sell your stock without paying tax on the gain as long as you held the stock for more than five years and the business is a C corporation.
This doesn’t just apply to new companies. If you are a partnership or S corporation, you can form a subsidiary that is a C corporation and contribute your business assets to the corporation in exchange for stock. Since partnerships and S corporations are allowed to own Section 1202 stock, this new corporation stock qualifies for the gain exclusion as long as you own the business for an additional five years.
18. Take Advantage of the Rental Property Tax Deductions if You Invest in Real Estate
Shawn Breyer, Owner, We Buy Houses Atlanta
If you own a house-flipping company, it makes sense to purchase small apartments for the business as well. This allows you to offset the taxes on your profits with rental property tax deductions while simultaneously building cash flow that can help sustain the business as it naturally fluctuates due to project delays or market cycles. Any company that serves the real estate industry can take advantage of this approach without losing focus on their core business since this asset class is parallel to their current business.
19. File Your Taxes on Time
Lynn Udovich, Senior Tax Manager- Entrepreneurial Services, Nussbaum Yates Berg Klein & Wolpow LLP
It is important to timely file and pay any taxes due, since the Internal Revenue Service can impose late filing and late payment penalties. These penalties will vary based upon the type of business entity. For example, C corporations can be subject to a late filing penalty and a late payment penalty on any unpaid tax due. Partnerships can be subject to a late filing penalty based upon the number of partners. S corporations can be subject to a late filing penalty based upon the number of shareholders as well as a late payment penalty on any unpaid tax due. State taxing authorities have a similar approach. These penalties can be costly for a small business. Even if you cannot pay the tax, you should still file the tax return on time as it will really reduce penalties and show good faith.
20. Deduct Auto Expenses
Dustyn Ferguson, Founder, Dime Will Tell
If you use a car for your business, whether it’s part of the business or simply to get to the office, you can deduct the expenses associated with driving the car for business purposes, even if it’s a personal vehicle. Currently, you can deduct 54.5 cents per mile driven for business purposes, which can really add up over the course of a year. As a small business, this can make a big impact on the amount of taxes you’ll owe at the end of the year.
21. Donate Unused Inventory
Rob Webber, CEO, MoneySavingPro
If you have unsold or unused inventory, donate it and get the tax deductions instead of spending cash to store it. Company donations of money, supplies, and property are all considered deductible expenses. However, be aware that donations of goods greater than $500 have stricter reporting rules.
22. Consider Using a Tax Professional
Isaac M. O’Bannon, Managing Editor, CPA Practice Advisor
Even if you think you can manage to prepare your taxes on your own using one of the do-it-yourself online programs, a CPA or other tax professional is usually more affordable than you think. An experienced tax professional has seen everything and knows how to get you the most favorable tax deductions and benefits. This usually saves the taxpayer or business at least as much as the fee the tax professional charges, plus you get the added benefit of being sure that your returns were prepared and filed properly.
23. Track Your Medical & Charitable Miles
John R. Dundon II, President, Taxpayer Advocacy Services, Inc.
The auto expense deduction covers more than just business miles. You can deduct mileage driven for medical purposes as well as miles driven for charitable purposes. It is always important to track your mileage for both business and personal purposes, as a lot of personal miles can also be deducted.
24. Forecast Your Business Cash Flow
Blaine Bertsch, CEO, Dryrun.com
Build a cash flow forecast to estimate your tax impact and prepare for your payments as well as your deductions. Modeling out the flow of your receivables and payables alongside your budget and sales pipeline will not only help you at tax time, but forecasting all of those key factors in your cash flow will help you thrive and grow your business year over year.
25. Overpay Tax Estimates
Abby Eisenkraft, EA & CEO, Choice TaxSolutions, Inc.
Make sure enough estimated taxes are paid throughout the year to avoid interest and penalties. Many sole proprietors came from W-2 jobs and have a very difficult time remitting quarterly taxes. They are used to spending their entire paycheck, not understanding that the money they get when they are self-employed is not all their money—it includes their tax money too. As a result, many small business owners are unable to pay their tax bills because they didn’t budget properly and are hit with interest and penalties, and that becomes a vicious cycle.
26. Don’t Forget About Startup Costs
Gail Rosen, CPA PC, Wilkin & Guttenplan, P.C., Certified Public Accountants and Consultants
Small businesses are often not aware that any expenses that are incurred before the first sale are called “startup costs.” These costs cannot be deducted until the first sale but can be deducted over 15 years. Plus, you can elect to deduct the first $5,000 in the first year of business. Many small businesses assume they can deduct all their costs in starting a new business, but they cannot until they have their first sale.
27. E-file Your Tax Returns
Crystalynn Shelton, CPA & Staff Writer, Fit Small Business
To have confidence that your tax return is received on time, you should file electronically. By filing electronically, you will save the money that you would have spent to send your return via snail mail. Most tax software programs like TurboTax allow you to e-file your federal tax return for free as long you have a tax ID number. If you need to file a state tax return, you can easily do that with TurboTax for an additional fee.
When you e-file, you receive a confirmation number after the IRS has successfully received your tax return. This is a much better alternative than dropping your return in the mail and wondering when or if it will be received. If you are expecting a refund, chances are an electronic tax return will be processed much faster than one received via snail mail.
If you are planning to do your own taxes, check out our tax software guide to see our top picks.
One of the most important tips to save on business taxes is to ensure that you don’t miss out on any qualified deductions. You should be able to seamlessly track your income and expenses throughout the year to make it easier for you to file your tax return. Also, don’t forget to use the other expert business tax saving tips listed above.