Every small business owner in the United States is required to pay taxes. The exact amount varies based on your business structure and the state you are in, but this is one of the largest business expenses you will have. On average, small businesses pay a 19.8% tax rate. In addition to being one of the largest expenses, it’s also one of the most important. If you don’t pay your taxes or you pay them late or inaccurately, the consequences could be disastrous for your business, as well as you and your family.
The good news is, there are some legal things you can do to reduce your taxable income and therefore, your tax liability. If you are a small business owner in or near Cincinnati, the financial professionals at Orcutt & Co. can help you with your tax planning. We offer a variety of services including tax prep, payroll management, accounting, and more.
In this article, we’ll explain some of the ways that you can decrease your small business taxes and maximize your profit.
7 Tips for Reducing Tax Liability for Your Small Business
Below, we will discuss 7 legal ways that you can reduce your small business tax liability.
Pay for health insurance
While it can be expensive, the IRS offers advantages for self-employed individuals who pay for their own health insurance. When you work for someone else, you typically share the cost of health insurance with your employer. However, if you are self-employed and unable to receive health insurance through a spouse, you may be eligible for the self-employed health insurance deduction.
This deduction allows you to claim all or part of your premium. Typically, the adjustment is limited to your net profit from the business under which the plan is established, which can reduce your tax bill and save money for each year you qualify for the deduction.
Start saving for retirement
There are several tax advantages for small business owners who start saving for retirement. If you are self-employed with no employees, consider investing in a single-participant 401(k), also known as a Solo 401(k). This allows you to save up to 100% of your income as an employee contribution. In addition, you may be eligible for an employer contribution based on your net income.
Another option is to invest in a SEP IRA, or Self-Employed Person Individual Retirement Account, which allows you to save up to 25% of your income. You may also contribute to Traditional and Roth IRAs, which can reduce your tax bill.
Claim the QBI deduction
If you are reporting your business income on your personal taxes, you may be able to claim the QBI, or qualified business income, deduction. This deduction is available to the following:
- S corps
- Sole proprietorships
This deduction allows you to deduct up to 20% of your QBI on your taxes. Single filers with a taxable income under $170,050 and joint filers with a taxable income under $340,100 qualify for this deduction. If you earned more than this, you may be eligible for a prorated deduction.
Using your personal vehicle for business purposes
Based on the nature of your business, you may be required to drive. If you use your personal vehicle for this, you may be able to reduce your taxes. There are two ways that you can determine the amount of your vehicle deduction:
Standard rate: for 2022, the IRS standard mileage rate is 58.5 cents/mile for January 1 through June 30 and 62.5 cents/mile for July 1 through December 31. You will need to keep track of your total mileage, as well as the mileage for business purposes. This does not include mileage for your commute.
Actual expenses: alternatively, you can tally up expenses related to your vehicle including fuel and oil, tires, taxes and registration, maintenance/repairs, insurance, rental/lease payments, and more. You’ll need to keep track of the percentage of business versus personal use.
Equipment depreciation expense
Generally, owning and maintaining equipment is part of running a small business. Over time, equipment depreciates in value- which the IRS allows you to offset a portion of your income based on this depreciation. There are several different options for claiming depreciation, including:
- Section 179 deduction
- Bonus depreciation
- MACRS depreciation
You may be able to deduct these expenses at one time or spread it out over several years- either way, your small business taxes are reduced.
Home Office deduction
If you use a portion of your home for your business, you may be able to claim the home office deduction. However, there are two criteria that must be met in order to qualify for this deduction:
- Must be regularly and exclusively used for business purposes.
- Must be the primary location for your business or where you regularly meet with clients.
Finally, you can deduct financing costs associated with your business including fees and interest on credit cards, loans, and other types of credit. However, there are certain criteria that must be met. You’ll want to consult with a professional to determine which costs qualify for this deduction.
Let Orcutt & Co. Help You Decrease Your Small Business Taxes
Orcutt & Co. understands that when you own a small business, every penny counts. If you can reduce your tax liability, you increase your profit- which you can then use to reinvest in your business. We can help you determine which deductions apply to your business.