Posted by Tasnim Ahmed
November 17, 2022 | 3-minute read (563 words)
With business success comes taxes. But that doesn’t mean you should pay more than you have to.
With the 2023 tax season just around the corner, the deadline for some tax-saving strategies is set to pass upon year’s end. To help reduce your total taxes owed, get serious about tax planning, now and into the future.
Tapping into certain deductions and credits, as well as taking certain proscribed actions before year’s end, are your best chance of trimming your business’s tax liabilities.
Below are five year-end tips for small businesses to capitalize on tax savings.
Arguably the most important thing to do is consult with your accountant. You’ll need to review the year together and make projections for the remaining months.
Organize your documents so they’re ready for your accountant to evaluate and maximize your deductions. Be sure all estimated taxes are paid or adjusted as necessary to avoid overpaying or underpaying.
Clean up your financial records
Consider writing off any long-overdue receivables still on your books but unlikely to be paid. Uncollectible bad debt can be subtracted from your taxable income once it’s been taken off your balance sheet.
Inventory whose value is reduced, including raw materials, in-progress products and finished merchandise, can also be written off the balance sheet. Write-downs are treated as expenses that reduce net income and tax liability.
While poring through your records, you may realize that even though you’re well organized, it’s increasingly hard to stay on top of your balance sheet, expenses and income, let alone file business taxes. A reputable outsourced tax service can help take this burden off your plate.
Pay out bonuses
A bonus, an additional payment to an employee beyond salary or hourly pay, can be written off as a business expense. That means paying out bonuses trims your taxes as an employer while also potentially boosting retention.
Thinking of paying yourself a bonus as business owner? Not so fast. Bonuses are not deductible business expenses for LLCs, partnerships or sole proprietorships, since they’re considered self-employed by the IRS.
The Section 179 deduction lets business owners expense most or all of their fixed asset purchases in their first year, with a deduction limit of $1.08 million in 2022. The key requirement is that these assets must be placed into service by the end of the year.
Even though you may have financed the purchase, you can claim the full deduction for the purchase.
Set up or revisit retirement plans
Establishing a retirement plan is an excellent way to save on taxes for small business owners. For 2022, if your business has a 401(k) plan, both you and your employees can save up to $20,500 and an additional $6,500 for those age 50 and up.
You might also consider switching from a traditional Individual Retirement Account to a Roth IRA. You’ll owe taxes for the conversion, but the bill will be lower due to the decline of assets, and appreciation in those assets once the money is in the Roth IRA won’t be taxable.
Taxes are typically the biggest expense for small business owners, and that’s unlikely to change anytime soon. But you can help minimize your tax bill by following the measures described here and by undertaking routine tax planning.