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6 Best Tax Planning Strategies for Small Businesses

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Tax planning for business owners.
Tax planning should not be a once-a-year effort for business owners when it comes to filing taxes. You may be able to postpone filing your 2021 taxes until late 2022 using extensions. However, tax planning activities that can reduce your total tax liability need to be taken before the end of the current fiscal year.

As we welcome the tax season, today is the best time to do some proactive tax planning to reduce your tax payment in 2022 and beyond.

Tax planning should not be a once-a-year effort for business owners when it comes to filing taxes. You may be able to postpone filing your 2021 taxes until late 2022 using extensions. However, tax planning activities that can reduce your total tax liability need to be taken before the end of the current fiscal year.

Here are the top tax planning strategies to help you save tax dollars:

1. Review Your Company’s Structure 

What is your company’s corporate structure? Are you a sole owner, an S-Corp, an LLC, a partnership, or a C-Corp

The optimum structure for your business may change as your business and profits develop. Every few years, you should go through this with your CPA and more often if your business is growing rapidly or if there have been changes to the ownership.

2. Examine Your Business Retirement Plan

Establishing a retirement plan is one of the best methods for small business owners to reduce their taxes. This could range from a SEP IRA to a Solo 401(k) to a 401(k) combined with a defined-benefit pension plan. 

Would you prefer to make a large payment to the IRS or your own retirement account? The choice is self-evident. In case you were wondering, high-revenue small enterprises can potentially delay hundreds of thousands of dollars in income taxes each year.

Reduce your business taxes with a retirement plan.
Image by pasja1000 from Pixabay

3. Check If You Qualify for the Home Office Deduction

During the COVID pandemic, an increasing number of small company owners have begun working full-time from home. Home office deduction may be available to business owners who work remotely.

Every year, this important tax benefit can save hundreds, if not thousands, of dollars in taxes. The best part is that you already incurred these costs for housing, so if you’re doing business in your home you should claim the proper expense. You may have been told previously that home office deductions are a “red flag”. This is a myth. The IRS doesn’t red flag returns simply for using the deductions that are available.

4. Take Advantage of First-Year Bonus Depreciation

Typically, the IRS requires you to deduct the expense over the course of several years. One of the beneficial changes brought about by the Tax Cuts and Jobs Act (TCJA) is that qualified used and new property acquired and placed in operation during your 2021 business year now qualifies for a 100% first-year bonus depreciation.

To put it another way, you may be able to claim a tax deduction for the entire cost of assets purchased in 2021

5. Proactive Tax Planning for Potential Tax Changes in 2022

The Biden Administration has proposed raising taxes on anyone earning more than $400,000 per year as single filers and $450,000 for married couples filing jointly in 2021 and 2022. Many business owners earn significantly more than these figures. 

While you should not base major tax decisions on government suggestions, you should be prepared for the scenario that those changes become law. The higher your tax bracket, the more important propert tax planning and tax preparation is for you and your organization.

Even if the Biden Administration doesn’t make changes to the tax code, many of the current adjustments from the previous TCJA are only scheduled to continue until 2025. While the TCJA was a big triumph for all taxpayers, it’s important to know the available incentives and how to apply them properly to maximize your benefits. 

6. Take Charge of Your Tax Planning

Your income and deductions could become even more valuable if you time them correctly (as a result of proactive tax planning). If you use a pass-through entity (Sole Proprietorship, S Corporation, LLC, or Partnership), your share of the business profit and deductions are passed through to you and eventually taxed on your personal tax returns. Taxes are calculated depending on your total household income and filing status.

As of today, the 2021 federal income tax brackets are the same as the 2020 brackets, with a few inflation modifications. If you anticipate being in a comparable or lower tax bracket next year, you may want to consider deferring some income until 2022. Similarly, you may choose to postpone some tax deductions as well. These tax-saving techniques, at the very least, can help you defer part of your taxes from 2021 to 2022, giving you improved cash flow and more time to pay the IRS. 

Alternatively, you might postpone some deductions until 2022. This would result in greater income being taxed this year (2021), but a lower overall net tax rate for the two years combined.

Minimizing taxation is one of the best strategies for thesmall business owner to boost their net profitability, wealth, and cash flow of their small business. Work with your CPA to do a few projections throughout the year can help make the proper calculations that will tell you which path will benefit you the most.

Final Thoughts: Tax Planning Strategies in 2022

Many small business owners disregard tax preparation and don’t even consider their taxes until it’s time to meet with their accountants once a year.

Look no further for an experienced tax planner to take care of your books and taxes. Today CFO is offering free consultations to help you discover your ideal tax plan today!

About The Author

Tom is the creator of the AIM Framework and Accounting Impact Method. He spends less time on fruitless theoretical methods, and most of his time bringing practical financial, tax, and technology solutions to business owners who want to make an impact on the world.

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