It can be a dream to start and grow a business, but it’s also a monumental responsibility. Tax obligations can often become a focal point of stress for founders and small business owners. Understanding tax-saving strategies can be essential in keeping more money in your company’s pocket, no matter if you’re launching your first startup or managing an established business.
These 10 practical tips, backed by recent data and research, can help you make informed decisions and avoid common pitfalls.
1. Maximize your deductions: don’t leave money on the table
Reducing tax liability starts with maximizing deductions. It is important to properly document all your expenses, like meals, supplies, or any traveling that is directly related to your company. Many of these expenses are fully deductible and can significantly lower your tax liability over time.
A 2023 QuickBooks survey revealed that 45% of small business owners fail to take full advantage of deductions, often due to poor documentation or awareness. When small business owners do not take advantage, they can end up leaving money on the table.
2. Claim the home office deduction
This links back to the first tip. If your business operates from home, calculate the exact portion of your home used exclusively for business activities. The IRS allows you to deduct a percentage of mortgage interest, property taxes, utilities, insurance, and home repairs based on the square footage dedicated to business use.
Keep detailed records of expenses and separate personal and business use. This will help you save money without getting audited.
3. Take advantage of tax credits
While deductions reduce taxable income, tax credits directly reduce the tax you owe. The U.S. Chamber of Commerce reported in 2023 that only 30% of small businesses apply for all eligible credits. The Research and Development (R&D) credit is especially overlooked.
In 2022, the IRS simplified its application, allowing startups to offset payroll taxes, saving them thousands. Other credits include those for energy-efficient equipment and employee training.
4. Pay estimated taxes quarterly
Many new business owners neglect to pay quarterly estimated taxes, as they believe that they can settle in April. However, the IRS requires quarterly payments, especially if you expect to owe more than $1,000 in taxes. Failing to do so leads to penalties and interest.
In 2023, the IRS collected over $3 billion in penalties related to underpayment of estimated taxes, a 10% increase from 2022.
5. Use accounting software to track income and deductions
Avoid the headache of estimating your taxes at the last minute with accounting software. While your cash flow can fluctuate throughout the year, investing in accounting software helps track both income and expenses in real-time. In the end, you’ll be able to provide the IRS with more accurate and up-to-date financial data.
This not only simplifies calculating quarterly tax payments but also reduces the chances of errors, so you can also avoid costly penalties and stay organized during tax season. Plus, many software options can integrate with other business tools, further streamlining operations.
6. Choose the right business structure
The type of business structure—such as an LLC, S-Corp, or C-Corp—you choose can also determine the amount of money you pay on your taxes. In 2023, the Small Business Administration (SBA) found that more than 60% of small U.S. businesses were LLCs. LLCs offer pass-through taxation, meaning income is taxed once at the individual level.
Meanwhile, S-Corps allow business owners to save on self-employment taxes by designating earnings as distributions, avoiding payroll taxes. Each structure has its benefits and challenges, so choose carefully.
7. Deduct health insurance premiums
Self-employed individuals can also deduct health insurance premiums for themselves, their spouses, and dependents. The IRS allows you to write off premiums paid out of pocket, reducing taxable income. In 2023, JP Morgan Chase confirmed that 18.2 million people were enrolled in the individual market, yet many small business owners miss this deduction.
8. Defer income to the next tax year
Deferring income can lower your current tax bill, especially if you expect a lower tax rate next year. Delaying invoicing until after January 1st shifts income to the next tax year, reducing your immediate liability.
There are many small businesses that take advantage of this strategy to improve cash flow and manage taxes. However, you must stay within IRS guidelines to avoid penalties.
9. Contribute to a retirement plan
One of the most tried-and-true strategies for saving money on taxes is to contribute to a retirement fund. Setting up a SEP-IRA or Solo 401(k) helps lower your taxable income while securing your financial future. In fact, contributions are tax-deductible, with Solo 401(k) limits up to $66,000 for 2023.
A Fidelity study revealed that 34% of small business owners aren’t utilizing retirement plans, missing out on tax savings. Contributing to a retirement plan benefits your current tax situation and long-term wealth.
10. Stay updated on tax law changes
Tax laws can change yearly, impacting how much you owe. In 2023, changes from the Inflation Reduction Act affected corporate tax rates and increased IRS audits, particularly for businesses with revenue over $400,000.
Even though the law is close to two years old, many American business owners are unaware of the wide-ranging tax relief incentives on offer, or the latest rate adjustments. The ever-changing legal environment is a good reason to hire an expert CPA and use up-to-date tax software.
Save thousands by using approved tax-efficient strategies
When you incorporate these strategies, you can save thousands each year, enhance cash flow, and stay compliant with IRS regulations. Consult a qualified tax professional like David’s Family CPA so you can implement the most efficient and legal strategies and reduce your tax burden.
Proactively managing taxes helps small business owners focus on growth and profitability, rather than facing unexpected tax bills.