Tax planning is an essential aspect of every business, both big and small. However, when you want to expand your business, it becomes necessary to plan your taxes properly. Taxes can take up a considerable chunk of your investment returns, and only through strategic planning can you save this substantial amount. When you are a small business, any savings are helpful as you can invest the money in other ventures or just improve your business.
Tax planning for small business is much more than managing your investment and affects every single aspect of your business, from salaries to income sources, expenditure, and financial decisions. It is bout analyzing your financial profile and creating a strategy to minimize your tax liabilities.
Many tax-saving benefits are legally available to small businesses. Consider the following points while planning your taxes.
Figure Out What Tax Deductions Your Business Qualifies For
You can deduct 20% of qualified business income while calculating your federal taxes under the Qualified Business Income (QBI) deduction in the Tax Cuts and Jobs Act (TCJA). But you qualify for this only when your business is a pass-through entity, a sole proprietorship, a partnership, or an S corporation. Ask a professional to help you determine the best classification for your business.
Take General Business Credits
With tax credits, the federal government encourages businesses and individuals to adopt certain policies that promote a larger good. For example, you can qualify for tax credits for going green, providing health coverage for employees, or promoting employment to the disabled. All these tax credits come under General Business Credit. It can help you lower your taxable income and save money.
Benefit on Deductions For Equipment
Section 179 deduction is a great thing as you can take deductions for the equipment or property you’re using as a service. You can get a federal tax deduction of an amount up to $1.04 million if you buy equipment and place it in service before the year-end.
In addition, you can take up to a 100 percent bonus deduction on specific equipment bought and put in use after Sept. 27, 2017. You can use this deduction to save money on your business tax return.
Set Up A Retirement Plan
You can save money by setting up a retirement plan for yourself and your employees. Any contribution you make to these plans is tax-deductible. Besides, you can also get a tax credit to pay for certain retirement plans.
There are several retirement saving plans that can help get valuable tax benefits, including SEP-IRA, SIMPLE IRA, 401(k), and other profit-sharing plans. But remember, some plans need to be established before this year to get the tax deductions in 2022.
Understand Taxation On PPP Loans
The Paycheck Protection Program (PPP) enables you to cover employee salaries and other expenses through small business loans. In addition, under certain conditions, these loans can be forgiven too. Forgiven loans are not taxable, but the complete tax picture can be more complicated. The IRS states that deductible expenses like payroll costs are not tax-deductible if they are funded with PPP loan proceeds.
The sooner you plan your taxes for the year, the better prepared you’ll be to prevent any cash flow disruptions. With proper planning, you can distribute the tax burden throughout the year. So, instead of looking for full tax payment at the end of the year, you can pay off the estimated taxes to the IRS. This will help you avoid any penalties later.
Besides, you can delay the billing for work done and write off bad debts to lower your tax liability in the current year. So, practicing early tax planning for small businesses can reduce your taxable income and help keep more of your money in hand. This will enable future investment or expansion decisions.