One of the many responsibilities of owning a small business is paying taxes. Many small business owners claim that paying taxes, while this is one of the most important tasks, is one of the least enjoyable. This is because many of the tax laws can be confusing- which is why it’s important to work with a professional and be mindful of any tax tips.
If your business is located in Southeast Wisconsin, consider working with Nolan Accounting. We can help you with all of your accounting needs, including tax prep. By working with us, you can be sure that your taxes will be done right so if the IRS does decide to take a closer look, you have nothing to worry about.
In this article, we’ll explore a few tax tips for small business owners to help you as you prepare to file taxes in April.
10 Tips for Small Business Taxes
Below, we’ll explore 10 tax tips for filing as a small business:
Do Your Research
There are lots of tax credits designed to help small businesses. A tax credit is the closest thing to free money you’ll ever get, as it reduces your tax liability. For example, if your business has $5k in tax liability but you have $3k in tax credits, your tax liability is reduced to $2k. Take your time to do your research and ask your tax professional about tax credits that may apply to your business.
Save All Receipts
Some business expenses qualify as business tax deductions. Therefore, if you neglect to record an expense, you may be throwing away free money. An expense becomes a deduction if it is “ordinary and necessary”. Deductions are also referred to as “tax shields” and, while they don’t offer the same dollar-for-dollar reduction in your tax liability, it does reduce your taxable income. By maximizing your deductions, you reduce taxable income- and your tax liability.
Take the QBI deduction
The QBI, or qualified business income, deduction reduces taxable income by 20%. You don’t have to do anything at all to qualify, making this the ultimate self-employed tax deduction. The only requirement is that you have a pass-through business.
Carry Over Losses
Most small businesses operate at a loss for the first few years. Once you start earning a profit, you can use those losses to reduce your tax bill with what is known as the net operating loss, or NOL, deduction.
Set up a Retirement Account
Whether you are a solopreneur or you have employees, contributions to retirement plans can offer tax benefits. However, it is important to note that as a solopreneur, your contributions are tax-deductible to a certain limit- but you will pay income tax when you withdraw these funds in retirement.
Take the Home-Office Deduction
If you work from home, you can qualify for a home-office deduction when you dedicate a portion of your home to running your business. There are two ways that you can calculate this deduction. The easiest way to do it is to determine the square footage used to operate your business and then multiply that by $5. The catch is that space cannot be multi-purpose- it can only be used to operate your business.
Deduct Business Use of Your Vehicle
When you use your personal vehicle for business purposes, you can use that as a deduction as well. The easiest way to do this is to determine how many miles were for business purposes and multiply that by the current IRS mileage rate. For 2022, this rate was 58.5 cents/mile for January 1 through June 30, and 62.5 cents/mile from July 1 through December 31.
One caveat is that you can’t deduct your daily commute- this is considered a personal trip.
Donate Old Business Equipment
At the end of the year, look around your office and see what you’re not using. Gather it up and donate it for a tax deduction. When donating it to a 501(c)3 nonprofit organization, you can deduct the fair value of the equipment. If it’s too outdated or worn out to donate, you can claim a Section 1231 for tossing it out.
Depreciate Fixed Assets
Instead of expensing fixed assets when purchasing them, they should be depreciated over their useful lives. In order to match your financial reports, use the Modified Accelerated Cost Recovery System- which is the proprietary method of the IRS.
You may be able to deduct the entire purchase price within the first year by using a bonus depreciation or Section 179 deduction. However, it’s important to note that there are restrictions.
Consider Restructuring Your Business
Your business structure can have an impact on your taxes. A small business typically fares better as a pass-through entity, which is where the business and the owner are considered one taxpayer.
S-corporation taxation can help you reduce your payroll taxes because owners who are also managers are employees and can be paid via salaries and dividends. The dividends are not subject to payroll taxes. However, you cannot fully avoid payroll taxes- you must take a reasonable salary before taking distributions.
Let Nolan Accounting Help with Tax Prep
Even with these tax tips, small business taxes can be a challenge and doing it incorrectly results in unwanted consequences. If you have a small business in the Southeast Wisconsin area, let Nolan Accounting handle your tax prep needs. We have the experience and expertise to make sure your taxes are done right. We also understand that tax laws can be complicated and are always changing, so we stay on top of those so that you can maximize your deductions.