The first time dealing with Uncle Sam as a small business owner can be intimidating. When you know what to look out for from day one, you can minimize your tax burden and keep more of your hard-earned cash in your business account.
Here are 10 tax-advantaged tips to keep in mind as you explore submitting taxes for your small business.
Beyond the usual deductions, lesser-known tax credits can significantly reduce your tax bill. You likely won’t qualify for all of them, but here are some of the most common tax credits worth investigating.
Work opportunity tax credit (WOTC): You can qualify for the WOTC if you hire from specific groups of employees such as veterans.
Research and development tax credit: To qualify for the research and development tax credit, you must participate in activities that involve developing or improving products, processes, software, or formulas.
Small business healthcare tax credit: If you have fewer than 25 employees and pay at least half of their premium costs, you may qualify for the small business healthcare tax credit.
If you purchase a lot of office equipment, take the time to research the Section 179 deduction. I It’s a tax provision that allows businesses to deduct the full purchase price of qualifying equipment purchased or financed during the tax year including:
Office furniture
Certain vehicles
Off-the-shelf software
Computers
Rather than depreciating the asset over several years, Section 179 lets businesses deduct the full cost during the first year of ownership. Small businesses can benefit from this deduction by accelerating depreciation expenses and reducing taxable income.
If you use a portion of your home exclusively for business purposes, such as a spare bedroom or a corner of your basement, you may qualify for the home office deduction whether you rent or own your home. This deduction allows you to deduct certain expenses related to your home office. Eligible expenses typically include:
● Homeowners insurance
● Homeowners association fees
● Business cleaning services and supplies
● Mortgage insurance and interest
● Utilities such as electricity, phone, internet, and heat
The home office tax deduction1 can be calculated two ways: based on the percentage of your home used for business or using simplified square footage. Accurately track your expenses throughout the year to take full advantage of this deduction.
Self-employment tax2, which includes your Social Security and Medicare taxes, is taxed at a rate of 15.3% of net earnings for 2024. Unlike traditional employment, where your employer covers half of these taxes, you’re responsible for paying the full amount when you’re self-employed.
However, you can deduct half of your self-employment tax as an adjustment to income, reducing your taxable income.
If you have family members active in your business, consider officially employing them.
Hiring a family member offers several opportunities to save on taxes. One significant benefit is small business owners can deduct their spouse's entire retirement plan contribution from payroll, effectively reducing their taxable income. Additionally, a Solo 401(k) plan3 allows both spouses to contribute, maximizing retirement savings potential.
If you have a high-deductible health plan, consider contributing to an HSA. Funds in an HSA can roll over year-to-year and can be invested, generating interest or investment returns.
Most importantly, they offer a triple tax advantage. Contributions are tax deductible, earnings grow tax free, and withdrawals are tax free for qualified medical expenses.
If you use your vehicle for business purposes, keep detailed records of mileage and expenses. You can choose between deducting actual expenses or using the standard mileage rate. Just choose the one that results in a higher deduction.
If you prefer deducting actual expenses, track gas, maintenance, insurance, and depreciation costs. Otherwise, you can choose the simplified approach of the standard mileage rate set at $0.67 per mile4 in 2024.
Training or educational expenses related to your business may be deductible including workshops, seminars, or courses.
There are specific requirements for tax deductions for education when you’re self-employed. Here's a breakdown:
Education must improve skills in your trade.
It should be legally mandated or necessary for license maintenance.
Temporary work absences can also qualify.
Deductions cover tuition, books, supplies, and transport.
Separate rules apply for business courses versus degree programs.
Even if you're self-employed, it doesn’t mean you don’t have access to a retirement account. You have several to choose from, all with unique tax advantages.
SEP-IRAs and SIMPLE IRAsoffer tax-deductible contributions, lowering taxable income, and providing immediate tax savings. As mentioned earlier, Solo 401(k)s are tailored for sole proprietors (and their spouses), offering higher contribution limits and tax-deductible contributions, helping to maximize tax savings
Tax laws can be complex, and a tax professional can help you uncover deductions and credits you may not be aware of. They can also provide personalized advice based on your specific situation.
While you may be able to handle your own taxes as a small business owner, hiring professional tax services can save you more money in the end or at least help provide peace of mind that you’ve filed correctly.
Being a small business owner comes with many responsibilities, and one of those is handling the taxes. However, there are plenty of opportunities to help reduce your tax burden. There’s no one-size-fits-all combination of deductions, so take the time to research your options or reach out to a professional for help in maximizing your deductions and credits.
At New York Life, we understand the unique needs of small businesses and can work with your tax professional to make sure the financial tools you have in place are being accounted for when doing your taxes. We are dedicated to providing tailored life and disability insurance solutions for both owners and employees alike.
1 https://turbotax.intuit.com/tax-tips/small-business-taxes/the-home-office-deduction/L1RZyYxzv
3 https://www.investopedia.com/ask/answers/100314/do-i-need-employer-set-401k-plan.asp
This article is provided for general informational purposes only. Neither New York Life Insurance Company, nor its agents, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.
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