Proactively managing your taxes makes all the difference, whether you’re a solopreneur, freelancer, or small business owner. Through proper tax planning, you will maximize deductions, reduce liabilities, and keep more of your hard-earned money.
While taxes often feel like a maze—confusing, frustrating, and way too easy to get lost in—the experts at KB Tax Deviser know the ins-and-outs of tax planning and are here to help you make smarter financial decisions without the stress.
1. Keep Accurate and Detailed Records
One of the simplest yet most effective ways to maximize deductions is by maintaining organized records. With poor record-keeping comes costly errors and missed deductions. Here’s how to stay organized:
- Track income and expenses using accounting software such as QuickBooks, Xero, or FreshBooks.
- Digitally store and categorize receipts, invoices, and bank statements to make tax time easier.
- Keep a log of cash expenses, as these are easy to overlook but still deductible.
- Check your accounts regularly to keep your financial records accurate and up to date.
Having well-documented records will only help you in the long run, ensuring smoother tax filing and helping to substantiate deductions in case of an IRS audit.
2. Understand Deductible Business Expenses
According to the IRS, businesses are allowed to deduct any ordinary and necessary expenses sustained during operations. [MM1] Some common deductions include:
- Home Office Deduction: If you work exclusively from a home office or dedicated workspace, you may qualify for a special deduction based on the percentage of your home’s square footage used for work.
- Vehicle Expenses: Deduct either the actual expenses (gas, maintenance, insurance) or use the IRS standard mileage rate for business-related driving.
- Office Supplies and Essential Equipment: Items such as computers, software, printers, and even furniture are deductible. Consider Section 179 to expense large purchases.
- Professional Services: Fees for accountants, consultants, and legal services that help run your business are deductible.
- Marketing and Advertising: Website development, social media advertising, branding, and promotional materials are all eligible deductions.
- Employee Wages and Benefits: Salaries, health insurance, and employer contributions to retirement plans are deductible expenses.
With these 6 simple deductions, you will significantly reduce your taxable income. See more about deducting business expenses here.
3. Take Advantage of Deductions from Section 179
Section 179 of the IRS tax code allows small businesses to deduct the full purchase price of qualifying equipment and software in the year it is placed in service, rather than depreciating it over time. This is particularly useful for small businesses looking to reinvest savings into their operations for items such as computers, software, machinery/equipment, office furniture, fixtures, and even vehicles used for business purposes.
4. Employ Retirement Plans
Contributing to a tax-deductible retirement plan helps reduce your taxable income, secure your future, and provide other serious tax advantages. Consider these options:
- Solo 401(k): Ideal for self-employed individuals, allowing contributions as both employer and employee.
- SEP IRA: A tax-deferred plan allowing contributions of up to 25% of income for self-employed individuals and employees.
- SIMPLE IRA: Crafted for small businesses with up to 100 employees, offering employer-matched contributions.
5. Leverage the Qualified Business Income (QBI) Deduction
The Qualified Business Income (QBI) deduction allows eligible businesses to deduct up to 20% of their pass-through business income. This applies to:
- Sole proprietors
- Partnerships
- S corporations
- Some LLCs
*Note: To maximize this deduction further, we suggest working with a tax advisor to determine your eligibility and optimize your taxable income.
6. Defer Income and Accelerate Expenses
If your business operates on a cash basis, reducing taxable income is achievable by:
- Deferring revenue: Delay invoicing clients until the next tax year to push income forward.
- Accelerating expenses: Prepaying rent, utilities, or business-related subscriptions before year-end.
This strategy is particularly useful in high-income years when shifting expenses place you in a lower tax bracket.
7. Hire Family Members
Employing family members in your business provides tax advantages:
- If you hire your children, their wages may be tax-free up to the standard deduction amount.
- Salaries paid to family members are deductible as a business expense.
- Transferring income to family members in a lower tax bracket reduces overall tax liability.
This strategy helps keep wealth within the family while lowering your business’s tax obligations.
8. Review Your Business Structure
Your business entity structure directly affects your tax liability. Consider the following:
- Sole Proprietorships and LLCs: Offer simplicity but may lead to higher self-employment taxes.
- S Corporations: Allow owners to take some income as distributions, reducing self-employment tax liability.
- C Corporations: May be beneficial for larger businesses due to lower corporate tax rates and growth potential.
By reviewing your business structure with a tax professional regularly, you’re using the most tax-efficient setup as your business scales.
9. Take Advantage of Tax Credits
Tax credits differ from deductions in that they directly reduce the amount of taxes owed. Identifying and claiming valuable tax credits leads to significant savings. Some of these aforementioned credits for small businesses are:
- Work Opportunity Tax Credit (WOTC): WOTC is an incentive for hiring employees from certain target groups.
- Research & Development (R&D) Tax Credit: R&D credit is for businesses that invest in innovation and product development.
- Employee Retention Credit (ERC): ERC is refundable credit for businesses that kept employees during challenging economic periods.
10. Stay Up to Date on Tax Law Changes
Tax laws are constantly changing and evolving along with the rest of the world, and new deductions or credits may become available as a result. Staying informed about these updates helps you:
- Take advantage of new tax credits and incentives.
- Avoid penalties or compliance issues.
- Adjust your business strategy to minimize tax burdens.
Working with a tax professional ensures you remain compliant and capitalize on the latest tax-saving opportunities.
11. Consult with a Tax Professional
Navigating tax laws is complex, and every business has unique needs. Consulting with a tax professional provides:
- Personalized tax planning strategies tailored to your business.
- Assistance with identifying and claiming deductions.
- Compliance with IRS regulations to avoid costly mistakes.
A tax expert helps you implement these strategies effectively, allowing you to focus on growing your business while minimizing tax burdens. KB Tax Devisers specializes in helping entrepreneurs and small business owners make smarter tax and business decisions. Our customized tax planning strategies ensure you maximize deductions, reduce liabilities, and stay compliant with evolving tax regulations.
Reach out today to take control of your business finances and secure a prosperous financial future!