5 Tips on How to Reduce Taxable Income for Small Businesses
What is taxable income?
According to IRS regulations, all income is taxable unless it’s specifically exempted by law. Some common taxable sources of income include:
Wages
Commissions
Tips
Bonuses
Income from free-lancing, self-employment, contracting, or business
Gambling winnings
The beginning of the tax year is a good time to review whether you are maximizing your deductions and maybe even get a second opinion on additional ways you can save on taxes.
How can I reduce my taxable income?
From business expenses to careful investments, there are several strategies that business owners can use to reduce the portion of their business income that can be taxed. We’ll share some with you today:
Make Smart Purchases and Investments
Section 179 of the IRS tax code allows businesses to deduct the full cost of capital assets (like machinery and equipment) when the property is placed in service rather than depreciating them over their useful life. A company can now expense up to $1,050,000 (up from $1,040,000 in 2020) deduction on new or used equipment.
Invest in your Employees
Salaries, benefits and even vacation time paid to employees are generally tax-deductible, as long as they meet a few criteria:
The “employee” is not the sole proprietor, a partner, or an LLC member
The salary is reasonable, ordinary, and necessary
The services were actually provided
You can deduct amounts you pay to your employees for sickness and injury, including lump-sum amounts, as wages. However, your deduction is limited to amounts not compensated by insurance or other means. In addition, you can generally deduct amounts you pay to your employees as awards, whether paid in cash or property; deduction limits apply.
Maximize Deductions
Use this list of commonly available small business tax deductions available to sole proprietors, partnerships, and LLC’s: advertising and promotions, business meals, business insurance, business interest & bank fees, education, legal and professional fees, moving expenses, rent expenses, telephone & internet expense, and/or travel expenses. Some of these deductions may not be available for your small business so we recommend that you consult with us before claiming one of these deductions on your tax return.
To give you an idea on how these deductions work, the cost of advertising and promotion is deductible. It can include hiring someone to design a business logo, launching a new website, and/or sponsoring an event.
Home Office Expenses
If you use a home office for your business, you may be able to deduct a portion of your housing expenses against business income. There are two options for taking the deduction. The simplified option is easier but may result in a smaller tax break. The standard option requires more complicated calculations and record-keeping but could give you a larger deduction.
Check your Business Structure
The form of business you operate determines what taxes you must pay and how you pay them. Your business may qualify for the qualified business income deduction (QBI). QBI is a tax deduction that allows eligible self-employed and small-business owners to deduct up to 20% of their qualified business income on their taxes. The qualified business income deduction is for people who have “pass-through income” — that’s business income that you report on your personal tax return. Entities eligible for the qualified business income deduction include: Sole proprietorships, partnerships, S Corporations, LLCs.
As business owners, CPA By Choice understands the importance of reducing the amount of taxes you pay and we want you to learn of ways to take advantage of breaks and opportunities that are available to you as a small business owner. Allow us to take on the accounting responsibilities of your business. We are available to answer your questions, feel free to call us or send us a message.