When you’re thinking about financial planning, small business owners often worry about how to lower their taxable income. The good news is there are several strategies that not only help reduce taxable income but also boost cash flow, allow for reinvestment in the business, aid in retirement planning, and help attract and retain employees.
First off, make sure you’re claiming all the business expense deductions available to you and keep detailed records. If you’re not sure, it’s a good idea to check with your CPA.
If you work from home, you might be able to deduct a portion of your home expenses like utilities, rent, or mortgage interest, depending on how much of your home is used for business. Ask your CPA about setting up an accountable expense plan.
Contributing to a retirement plan like a SEP IRA, SIMPLE IRA, or a 401(k) can also reduce taxable income.
If you’re self-employed, you might be able to deduct premiums for medical, dental, and some long-term care insurance for yourself and your dependents.
When you purchase equipment or property for your business, deducting depreciation costs over several years can help reduce taxable income.
Education and training expenses necessary for improving skills essential to your business might be deductible. Plus, offering educational assistance to your employees can help you bring in and keep great talent.
Hiring family members might allow you to shift income from a higher to a lower tax bracket, and their salaries can be deducted as business expenses.
Changing your business structure could sometimes lead to tax savings. For example, some businesses might benefit from being taxed as an S corporation rather than a sole proprietorship.
Make sure to take advantage of any tax credits your business qualifies for, like those for hiring certain employees, using eco-friendly practices, or investing in research and development. Restaurants, for instance, might be eligible for a FICA Tip Credit.
Finally, according to Section 179 of the IRS tax code, you can deduct the purchase price of qualified equipment or software bought or financed during the tax year, which can be a helpful way to keep more money in your business.
