Business Taxes and Strategic Planning for Small Business Owners

The landscape for small business taxes in the U.S. has undergone significant changes over the last three years, presenting unique challenges and opportunities. As a business owner or sole proprietor, the changes that have probably impacted you the most are the new tax laws. There have been more updates to the tax code in the last 3 to 5 years than at any other time in history. Top that with a dwindling pool of qualified CPAs, and we have a perfect storm.

Staying abreast of the evolving tax code and leveraging tax planning strategies is crucial—not only for compliance but also for maximizing your financial potential. Remember that tax planning is a year-round endeavor, not a scramble, as the calendar year approaches its close.

But running your business is your top priority—not keeping up with the new tax laws. Hopefully, we can shine some light on the main topics you should consider.

Choosing the Right Tax Professional for Your Business Needs

First, it’s important to recognize that not all tax preparers have the expertise needed for effective business tax strategies. In an era where qualified CPAs are in short supply, distinguishing between mere tax filers and those capable of offering substantial tax advice is vital. As you focus on running your business, it’s advantageous to engage a tax professional who can navigate the complexities of taxable incomes and deductions for you.

Second, before diving into the nuances of recent tax law changes, consider implementing tax savings tactics now. Beyond well-known deductions, like travel, supplies, and retirement plan contributions, there are several underutilized tax credits and strategies that could significantly reduce your taxes filed and increase tax benefits:

1. Income splitting to lower overall tax rates
2. Capital gain exemptions for qualifying investments
3. Energy investment deductions, including oil, gas, and solar tax credits
4. Benefits under Puerto Rico Act 60
5. Leveraged charitable contributions for sizable tax deductions
6. Tax-free income opportunities by renting your primary residence
7. State and Local Tax (SALT) deduction workarounds
8. Utilizing Donor Advised Funds for charitable giving

The saying by Arthur Godfrey, “I am proud to pay taxes, but I would be just as proud to pay half as much,” captures the sentiment of intelligent tax management. It’s not about evasion but about employing smart business tax strategies to keep your hard-earned money working for you.

Navigating the New Tax Code: Key Changes for 2023

Some of the pivotal changes in the tax code affecting your business taxes for 2023 include:

1. Secure Act 2.0. 401(k) tax credits
2. Net Operating Rules
3. Excess business-loss Limitation rules
4. Interest Expense limitation rule
5. Goodbye to the first-year bonus depreciation
6. State Disability Insurance withholding (SDI)

These could have significant implications for your tax bill and should be reviewed with a financial advisor.

100% Tax Credit of New Plan Costs for First Three Years

The SECURE Act 2.0 has introduced enhanced 401(k) tax credits to benefit your bottom line and your employees’ retirement plans. These tax credits can cover 100% of new plan costs for the first three years, potentially offering up to $15,000 in savings. Moreover, providing an employer match now comes with additional tax credits for small business taxes—up to $1,000 per eligible employee, which can be a considerable tax benefit.

Employer Match Provides Tax Credits of $1,000 per Employee

When you opt to match an employee’s contribution, tax credits of up to $1,000 per employee may be available to you.

While employer matches are already a deductible expense, providing matches for businesses with fewer than 100 employees can now lead to additional tax credits. Companies with up to 100 workers may be eligible for these credits, receiving up to $1,000 for each of the first 50 employees, provided their annual earnings do not exceed $100,000.

For the initial two years of implementing the plan, the credit rate is 100% per employee, up to the $1,000 cap. Subsequently, the rate drops to 75% in the third year, is halved to 50% in the fourth year, and further reduced to 25% in the fifth year of the plan’s duration.

Beyond that, there are no credits for subsequent years. Please note that additional tax credits are available for employees numbered 51 through 100, although these are at a reduced rate. Because this focuses on small businesses, if you have more than 100 workers employed, tax laws haven’t added any new credits for you.

Lastly, it’s worth noting that contributions for which you obtain a tax credit may not be eligible for further tax deductions. Nonetheless, any portion of the contribution that exceeds the credit amount should remain deductible. It’s advisable to consult with your tax accountant for a thorough review of your situation.

Auto-Enrollment Credit

Certain employers that incorporate an auto-enrollment feature into their retirement plans may qualify for an annual tax credit of $500, spanning a period of three taxable years. This commences from the initial taxable year in which the employer integrates the auto-enrollment provision into their plan.

Proactive Steps Towards Compliance and Tax Efficiency

The Federal Government has already stated they will roll out a nationwide retirement mandate for small business owners. With this potential mandate on the horizon, acting now not only saves you headaches later but is also a proactive compliance step. This can include deferring income into a 401(k) yourself to meet personal future mandate requirements or establishing a 401(k) option for your employees.

Remember, tax deductions such as the home office deduction and other small business-related write-offs can still be leveraged to reduce your taxable income. To ensure you’re making the most of these opportunities, it’s recommended to file your tax return with the aid of seasoned professionals.

With the right tax strategies and professional guidance, reducing taxes while complying with the IRS becomes a more straightforward and less daunting process. Contact a trusted tax advisor to ensure you’re positioned for immediate and long-term tax savings.