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Top 4 Small Business Tax-Planning Tips  

by
Sonu Shukla
on
7/18/2017
Top 4 Small Business Tax-Planning Tips  

Taking the plunge and starting that business you always dreamed of feels incredible. But you may find that you’re in for a rude awakening in terms of how much more complicated your taxes just became. You shouldn’t let taxes completely steer the course for your business decision-making, but these decisions will factor heavily into your tax planning.

Here are four of our favorite ways to save on business taxes.

  1. Choose the right entity that makes sense for your operations and business goals.

Do you plan on operating as a solopreneur or hiring employees in the near future? Bootstrapping your operation with your own cash or going for a professional investor? Your business entity should reflect what makes the most sense for your line of work as well as what the outcome of this entity will be on your personal finances. For instance, S corporations present may complications, but the additional administrative hurdles may be worth the substantial tax savings it could offer your business. If your business is not very elaborate, a single-member LLC may be the better choice.

Changing entities long after your business has been in operation is possible, but it’s tougher to do than choosing an entity on the outset. It may require winding down, then starting up again and disrupting operations. Talk to your tax professional about your business and personal finances and goals to determine which entity looks like the best option as there’s no one-size-fits-all solution.

  1. Take advantage of the greater retirement savings options available to small business owners.

Even if you’re a corporation of one, you can set up a solo 401(k) plan, Simplified Employee Pension, Roth 401(k), and so much more than the options available on the individual market. When your income increases substantially to the point that a SEP is worth setting up, you can put aside almost triple the amount that a standard 401(k) would allow you and get major tax savings for building your nest egg.

  1. You can deduct your home office expenses, but you should think carefully about whether you should take this deduction.

Contrary to popular belief, you don’t need to use a separate room as a home office to take the home office deduction, which is a portion of your housing expenses relative to how much of your home is used for said workspace. But the area needs to be totally separate from your personal life, and you need to prove that it is both exclusively and regularly used to conduct business. Many start-ups and solopreneurs gravitate to working outside the home in coffee shops, temporary offices, and co-working spaces to meet like-minded people and get out of the house. Subsequently, so many people unwittingly kill their home office deductions because that regular and exclusive element is no longer present.

If you own your home, opposed to renting it, you may also want to reconsider if the home office deduction is worth it over the years. If you compute your home office deduction using the regular method, you may have to pay taxes on the depreciation that you deducted since the home gain exclusion does not apply to depreciation claimed on the home. However, that can be avoided by using the simplified home office deduction, which does not utilize depreciation as a portion of the deduction.  The regular method almost always provides the larger home office deduction, so careful consideration should be given to which method is best for your business. 

Renters have an easier time because a portion of your rent is deducted, and if you move, you’ll need to recalculate your deduction for your new home but otherwise have no extra surprises.

  1. Accelerate or decelerate your income or spending depending on other events of the tax year.

If you happened to have a really good year, you can opt to increase your investments in new projects and equipment, so you can pay fewer taxes now. The same goes if you anticipate needing to make crucial investments in new hires, equipment and projects, and you aren’t sure if your income will be enough to sustain them. You can also carry losses back and forward to mitigate your resulting tax bills if times were good. There will virtually always be some kind of allowable deduction such as going to a convention.

There are so many gifts to small business owners and solopreneurs hidden in the tax code. While your new tax situation is definitely more complicated than it was as an employee, you have more control over how you can generate significant tax savings with the help of an adept tax professional.

Sonu Shukla, CPA writes for TaxBuzz, a tax news and advice website. Reach him at [email protected].

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Sonu Shukla

Sonu Shukla

Sonu Shukla is a CPA, accountant, and tax preparer based in Orlando, FL. Sonu Shukla can assist you with your tax preparation and planning needs. Sonu is more than just another accountant in Orlando, Florida; he is a small business owner himself. It is a position in life that grants him the perspective and insight to emphasize with his clients, bringing them the best service possible. A Certified Public Accountant and a Certified Financial Planner, Sonu possesses the skills, education and experience to demonstrate unerring business acumen and passionately planned financial strategies. Being proactive is key for Sonu, tailoring highly efficient tax plans for his small business clients, all in a one on one environment where he and the client can bounce ideas around until every detail is worked out.

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