4 Tax Steps Small Business Owners Should Take Before 2023

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Making these tax changes before 2023 could save you a lot of money.


Key points

  • Small business owners should maximize their retirement savings and review their business structure before tax time.
  • Keep track of all your expenses so you can deduct them at tax time.
  • Accelerate or defer income to pay taxes when you’re in a lower tax bracket.

As a small business owner, it’s important to keep up to date with the latest tax strategies to minimize your tax liability. One way to do this is through tax planning. Tax planning is the process of identifying tax strategies to minimize your tax liability. With the New Year fast approaching, now is a good time to review some of the key tax steps you should take ahead of 2023.

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1. Maximize your retirement savings

Not only will your future self thank you for saving for your golden years, but you can also save on taxes along the way. There are several retirement savings plans available for small businesses, including SEP IRAs (Simplified Employee Pension), a SIMPLE IRA (Savings Incentive Match PLan for Employees), and Solo 401(k)s. These plans offer significant tax advantages, including the ability to deduct contributions from your taxable income and defer tax on investment income until withdrawal.

The 2022 contribution limit to a 401(k) is $20,500. For a SEP IRA, contributions are limited to 25% of your net income from self-employment (not including contributions for yourself), up to $61,000 for 2022. For a SINGLE IRA, employees are allowed to make payroll contributions up to $14,000, not including employer contributions. You can also contribute to a Traditional IRA. The contribution limit is $6,000 ($7,000 if you are 50 or older).

2. Review your business structure

Are you still using the same business structure you started with? If so, it might be time to re-evaluate if this is still the best option for your business. For example, if you have grown significantly since starting your business, you might want to consider converting to a C corporation.

Prior to the Tax Cuts and Jobs Act of 2017 (TCJA), the top corporate tax rate was 35%. But the TCJA lowered it to 21%. This rate is significantly lower than the maximum tax rate of 37% for an individual. For LLC members in the top tax bracket, a change in tax status can result in significant tax savings. It is important to speak to a tax professional to help you determine the pros and cons based on your situation.

3. Maximize your deductions

Be sure to take advantage of any deductions available to you. One of the first things to do when planning tax is to review your expenses and deductions. This will help you determine which expenses are deductible and how much you can deduct. Remember that you can only deduct the portion of an expense related to your business.

For example, if you use your car for business and personal purposes, you can only deduct the portion of the expenses that relates to your business use. If you have a home office, you can deduct part of your rent or mortgage interest. Accounting software can help you track your deductible expenses. Here are some common deductions small business owners can take:

  • Health insurance premiums: You may be able to deduct the money you spend on health insurance premiums for yourself, your spouse, and even your dependents.
  • Marketing: Any money you spend on digital or traditional marketing, your website, conferences you attend, business cards you create, and other expenses that make people aware of your business can be deductible.
  • Business insurance: Any liability insurance, workers’ compensation, errors and omissions, etc., may be deductible.
  • Professional services: Hiring a professional to help you with marketing, a business lawyer, an accountant, etc. may be deductible.
  • Trip costs: Any business-related travel may be deductible, so keep track of all your receipts and expenses.

4. Income Deferral or Acceleration

Income is taxed the year it is received. Depending on your situation, you may be able to choose to pay higher taxes this year or next year. Why pay now if you can pay later? To reduce your tax burden for this year, carry forward any income you can to next year. For example, if you work on a cash basis, you can send invoices in January 2023. The money you receive then will not be taxable until 2024.

If, however, you want to lower your taxes for next year, take as much income as possible in 2022. Make sure you receive all your bills before the end of the year. This may reduce the income you claim in 2023, when your income tax may be higher. It makes sense to defer income if you think you’ll be in the same or lower tax bracket next year. You don’t want to defer income if it could push you into a higher tax bracket. If so, you might want to accelerate income this year so you can pay taxes while you’re in a lower bracket now, rather than in a higher bracket later.

Tax planning is an important part of running a small business. By taking advantage of these strategies, you can reduce your tax liability and keep more of your hard-earned money. Keep up to date with the latest tax news so you can take advantage of any opportunities or deductions that may be available to your business. Working with a tax professional can help you identify even more tax strategies to minimize your tax liability.

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