Jovan Johnson, MBA, CFP®, CPA/PFS

 

It is never too early to start planning your small business’s tax strategy. For many small business owners, taxes are one of the largest expenses they face, and a proactive approach to tax planning can make a significant difference to your bottom line. By developing a smart tax strategy, you will be better equipped to reduce your tax liability and keep more of your hard-earned money where it belongs—in your business.

No matter the type of business you run, tax planning is crucial to building a profitable, sustainable company. As you work with your CPA or tax advisor, consider the following small business tax planning strategies to help your business stay financially healthy and competitive.

Small Business Tax Planning Strategies:

1.) Choose the Right Business Structure & Tax Classification

One of the most proactive steps you can take in tax planning is choosing the right business structure and tax classification. Let’s break down the difference between these two terms.

Your business structure is established at the state level, while your tax classification is determined at the federal level. Importantly, these may not always align. For instance, you can form an LLC and choose to have it taxed as a sole proprietorship or S Corporation at the federal level. However, some states, like Louisiana, don’t recognize the federal S Corporation election and may treat your business as a standard C Corporation instead. Given these complexities, it is crucial to seek guidance from a CPA or business attorney familiar with your state’s regulations.

The right business structure and tax classification can significantly impact both your tax obligations and your personal legal liability. Creating a legal separation between yourself and your business not only optimizes tax savings but also protects your personal assets. In the event of an audit or legal dispute, a formal business structure can provide a vital layer of protection. For additional separation, it is essential to open dedicated business accounts, including checking, savings, and credit cards, to keep personal and business finances separate.

When selecting a business entity, consider factors such as liability protection, tax implications, administrative costs and complexity, long-term goals, flexibility, and state-specific regulations. Consulting with a CPA or business attorney can provide personalized guidance aligned with your business goals.

Choosing the right structure can make a difference. With the optimal setup, you could save hundreds or even thousands in taxes while ensuring solid legal liability protection.

2.) Take Advantage of Qualified Business Tax Deductions

If you are a business owner, a portion of your revenue goes toward expenses necessary to keep your operations running. While many of these expenses can be tax-deductible, they must meet IRS criteria to qualify. Specifically, business expenses need to be ordinary and necessary for your trade or industry.

  • An ordinary expense is one that is common and accepted in your field.
  • A necessary expense is one that is helpful and appropriate for running your business.

These guidelines ensure that deductions are legitimate and directly support your business’s success. Below is a list of potential qualified business deductions to consider:

  • Marketing and Advertising
  • Employees (W2) and Contract Labor (1099 Contractors
  • Bank and Merchant Account Fees
  • Legal and Professional Services
  • Office Expenses 
  • Office Supplies
  • Home Office
  • Continuing Education and Certifications/Licenses
  • Insurance
  • Maintenance and Repairs
  • Telephone and Utilities
  • Travel and Meals
  • Health Insurance
  • Retirement Plan Contributions
  • Qualified Business Income Deduction
  • Postage and shipping

To maximize your deductions, check out our Small Business Tax Deductions Checklist and see if you are capturing all available savings.

3.) Consider Deferring Income or Accelerating Expenses

Two effective tax planning strategies for small business owners are deferring income or accelerating expenses. These approaches can help you manage your taxable income based on your anticipated tax bracket for the upcoming year.

  • If you expect to be in a lower tax bracket next year:
    • Defer income to the following year
      Strategically push some of your income into the next year. For instance, if you typically invoice clients in December, consider sending the invoice just before year-end, knowing the payment will likely arrive in January.
    • Accelerate expenses into the current year
      Prepaying next year’s expenses can reduce your taxable income for the current year. For example, you could prepay your business insurance premium or purchase supplies you’ll need next year before December 31st.
  • If you expect to be in a higher tax bracket next year:
    • Reverse these strategies. Accelerate income into this year by invoicing and collecting payments earlier. Defer expenses by holding off on planned purchases until after the start of the new year.

Running a detailed tax projection can help you determine the most beneficial strategy for your situation. These simple yet impactful actions could save you hundreds or even thousands of dollars in taxes, ensuring your business remains profitable and tax-efficient.

4.) Establish a Self-Employed Retirement Plan

As a small business owner, contributing to a retirement plan is one of the most effective ways to reduce your tax bill while securing your financial future. Depending on your personal and business goals, you have several retirement plan options to consider:

  • Simplified Employee Pension (SEP IRA):
    • Simplicity and flexibility make the SEP IRA a popular choice, especially for solo business owners or those with a small number of employees.
  • 401(k):
    • Employee salary deferral limit: Up to $23,000 in 2024, plus an additional $7,500 if you’re 50 or older.
    • Employer contributions: You can contribute up to 25% of your net earnings from self-employment, for total contributions (employee + employer) up to $69,000 in 2024.
    • You can tailor your plans to access your account balance through hardship distributions and loans.
    • Solo 401(k): Ideal for business owners with no employees (other than a spouse), offering the same contribution limits.
  • Savings Incentive Match Plan for Employees (SIMPLE IRA):
    • Contribution limit (as an employee): Up to $16,000 in 2024, with an additional $3,500 if you’re 50 or older.
    • Employer contribution: Choose between a 2% fixed contribution or a 3% matching contribution.
    • Best suited for small businesses with a handful of employees looking for a straightforward retirement plan.
  • Defined Benefit Plan:
    • These plans allow for significantly higher contributions, depending on your income and retirement goals. While more complex, they can be ideal for maximizing tax deferrals. Learn more on the IRS website.

Additional Considerations:

  • Roth and After-Tax Contributions: Many of these plans offer Roth or after-tax contribution options, which can help you diversify your tax strategies for retirement.
  • Employee Impact: If you have employees, each plan comes with specific requirements and obligations. Be sure to understand how these will affect your contributions and compliance responsibilities.

By leveraging the high contribution limits of self-employed retirement plans, you can shield a substantial portion of your income from taxes. These plans are a critical component of an effective tax strategy for running a profitable and financially secure business.

5.) Pay Quarterly Estimated Taxes

Do you dread tax season because of unexpected bills or penalties? Avoiding that stress begins with paying your quarterly estimated taxes on time. This essential piece of tax planning helps you avoid costly penalties and interest while ensuring your business remains financially stable.

In general, you’re required to pay estimated taxes if you expect to owe at least $1,000 after accounting for withholding and credits and if your withholding is less than 90% of this year’s tax or 100% of last year’s tax.

The chart below outlines the IRS deadlines for quarterly estimated tax payments and the corresponding payment periods. Most states align with these dates, but it’s always wise to check for specific guidance.

Small Business Tax PlanningYour quarterly estimated tax payments should be enough to cover self-employment taxes (Social Security & Medicare), federal taxes, state taxes, and local taxes (if applicable). 

Missing a payment can be costly. The IRS imposes a failure-to-pay penalty of 0.5% of unpaid taxes for each month or part of a month the tax remains unpaid, up to 25% of the total. These penalties can add up quickly, cutting into your business’s profitability. Timely estimated tax payments not only prevent penalties but also improve your cash flow planning, keeping your business financially healthy year-round.

No matter the type of business you run, paying estimated taxes is crucial to building a profitable and sustainable company. Work with your CPA or tax professional to ensure you meet all payment deadlines and maximize your small business tax planning strategy.

6.) Work with a CPA or Tax Professional

Building a thriving and sustainable business requires having a trusted CPA or qualified tax professional in your corner. Tax laws are constantly changing at the international, federal, state, and local levels. A skilled CPA can help you navigate these complexities, ensuring your business remains compliant while you focus on day-to-day operations.

Beyond compliance, a CPA brings valuable expertise to optimize your tax planning strategies, helping you minimize liabilities and maximize profitability. From staying ahead of regulatory changes to uncovering tax-saving opportunities, the right CPA can be an invaluable partner in your success.

If you’re seeking expert guidance tailored to your business needs, consider scheduling a free consultation with our team. We’d be happy to discuss how we can support your journey toward a more profitable and tax-efficient future.

Final Thoughts

Effective tax planning is essential for running a profitable and sustainable small business. By implementing strategies like deferring income, maximizing deductions, establishing a retirement plan, and partnering with a qualified CPA or tax professional, you can minimize your tax liability while keeping your business financially healthy.

Tax planning isn’t just about saving money—it is about setting your business up for long-term success. Each decision you make today can impact your business’s financial future. Take the time to assess your current strategies, anticipate changes, and seek professional guidance to ensure you’re on the right path.

If you’re ready to take your tax planning to the next level, our team is here to help. Schedule a free consultation today, and let us show you how proactive tax strategies can make a difference in your bottom line.

Disclosures

None of the information provided is intended as investment, tax, accounting, or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement, of any company, security, fund, or other securities or non-securities offering. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. The content is provided ‘as is’ and without warranties, either expressed or implied. Piece of Wealth Planning LLC does not promise or guarantee any income or particular result from your use of the information contained herein.