Running a business is often full of daily struggles with staying within budget and maximizing profits.
As a small business owner, one way you can ease your financial burden is to take full advantage of the tax code. Not all small businesses are created equal, so you should tailor your deductions to your specific industry.
From tax-deductible vehicles to pension plan contributions, keep reading for our top 11 small business tax savings ideas.
- Put Your Spouse on Payroll
When it comes to your 401(k) / SEP IRA / SIMPLE IRA, putting your spouse on the payroll will double the contributions, and it will all be tax deductible. The employer contribution is an expense on the business side, and the employee salary deferral reduces W2 wages.
Keep in mind that 1) your spouse will have to pay payroll taxes on the money you contribute to their retirement, and 2) additional wages can affect the qualified business deduction, which we will talk about later.
- Pay Your Child a Salary
If you have children, you can pay them a small salary that is deductible for the business and is taxed to the child at a lower rate. Or, if you pay them no more than $12,000, and the standard deduction will reduce their taxable income to zero.
Your child can also open a Roth IRA and contribute up to $6,000 into it annually and never be taxed on the growth in that account. Of course, the added benefit is that your children can learn about work, responsibility, and investing.
Just be sure to keep good records of the hours they work and what tasks they complete, as they do have to be legitimately working for the company. You will also want to make sure you are paying them a fair wage for their age and the work they are doing.
- Purchase a 6,000+ Pound Vehicle
If your small business needs a new vehicle, it might make sense to purchase one that weighs more than 6,000 pounds. The reason for this is that it is an IRS Section 179 deduction, and you can immediately deduct up to $25,000 in the year the vehicle is placed into service (bonus depreciation may allow for a higher deduction).
Alternatively, in 2023, you will be able to deduct 80% of the cost with bonus depreciation, even if it is more than $25,000. Consult with your tax advisor to determine which deduction benefits you the most, as these decisions can affect your state tax returns as well as your federal return.
- Hire a Driver
If you use your personal vehicle for business purposes, you can deduct a portion of the costs of operating the vehicle.
You can either deduct a portion of your actual vehicle expenses, or you can use the IRS standard mileage rate, which is 62.5 cents per mile for business use in 2022. But you can’t do both. In other words, if you use the standard mileage rate, you cannot deduct your actual vehicle expenses.
However, you can hire a driver to use your personal vehicle for business purposes. The driver's wages are tax-deductible, and you can still use the standard mileage rate to deduct a portion of the vehicle's operating costs.
This can be a great way to save on taxes if you use your personal vehicle for business purposes.
- Accelerate Business Equipment Purchases for Section 179 Deductions
The Section 179 deduction allows you to deduct the full purchase price of certain business equipment immediately.
This deduction is designed to encourage small businesses to invest in equipment, and it can be a great way to save on small business taxes.
To qualify for the deduction, the equipment must be used for business purposes, and it must be purchased and placed in service before the end of the year.
The deduction is capped at $1,080,000 for 2022, and the maximum equipment purchase is $2,700,000.
- Purchase a Share of an Airplane
If your small business requires frequent travel, you might want to consider purchasing a share of an airplane. This can be a great way to save on taxes, as the costs of operating an airplane are fully tax-deductible.
The only caveat is that you must use the airplane for business purposes. If you use it for personal travel, you can only deduct a portion of the costs.
- Start a 401(k), SEP-IRA, or SIMPLE IRA
Employer contributions to 401(k), SEP IRA, or SIMPLE IRA retirement plans are a great way for a business owner to lower their tax bill, and they are a good way for employees to build wealth. The employer contribution, which can be in the form of profit sharing or a percentage match of the employee’s contribution, is also a small business tax deduction.
There are a few key things to remember when starting a 401(k), SEP IRA, or SIMPLE IRA plan:
- Employees must be given the opportunity to participate in the plan.
- Employers must make contributions to all eligible employees.
- Depending on the plan and the number of employees, you may need to work with a third-party administrator (TPA) to manage the plan.
When setting up a retirement plan, you may claim a deduction for the costs involved with setting it up, as well as educating your employees on it.
You can also claim an additional $500 per year for three years if you allow an auto-enrollment feature.
If you are a sole proprietor, setting up a solo 401(k) is very easy to do, and you can contribute both the employer and employee contribution to sock away as much as $61,000 in 2022.
- Explore Cost Segregation on All Real Estate Holdings
Cost segregation is identifying and classifying personal property and certain land improvements as business assets rather than real estate.
By conducting a cost segregation study, small business owners can maximize their depreciation deductions in the year the study is done.
Generally, the earlier you do a cost segregation study, the more tax deductions you can claim. However, even if you've owned your property for a while, it may still be beneficial to do a cost segregation study, as you may be able to claim catch-up deductions for a property that was previously classified as real estate.
- Optimize Your Qualified Business Income Deduction
The qualified business income deduction (QBI), also known as the section 199A deduction, is a small business tax deduction that was created by the Tax Cuts and Jobs Act.
This allows owners of sole proprietorships, S corporations, or partnerships to deduct up to 20% of their qualified business income from their taxable income.
To take advantage of this, your income must be below $170,050 for individuals (completely phased out at $220,050) and $340,100 for those married filing jointly (completely phased out at $440,100).
QBI does not include certain items of income. Some of these are:
- Investment items, like capital gains
- Interest income
- Dividends
- Annuities payments received not in connection with the trade or business
- Wage income
- Guaranteed payments from a partnership
- Start a Defined Benefit Plan
A defined benefit (DB) plan is a type of pension plan that allows you, the business owner, to contribute a large portion of profits into a tax-deferred retirement account and deduct the contribution from taxes.
While a DB plan can be a bit cumbersome and expensive to set up, it will allow you to save a significant amount of money each year–significantly more than a 401(k), SEP IRA, or SIMPLE IRA. Your accountant can guide you on the amount you could contribute–potentially hundreds of thousands of dollars–and the resulting tax savings.
- Create a Captive Insurance Company
A captive insurance company is an insurance company that is wholly owned by the business it insures.
So, if your small business is in the construction industry, for example, you could create a captive insurance company that provides insurance for your construction business.
While amounts depend on actuarial studies, if structured correctly, the insurance premiums are deductible to your business. The policy proceeds are not subject to small business taxes when paid out.
Takeaway
There are several small business tax savings ideas that you can use to save on your taxes.
Be sure to consult with a trusted wealth advisor or financial planner and your tax professional that can help determine which deductions and strategies make the most sense for your small business.
