The Basics of Tax Planning for SMBs

Planning to pay taxes is an important part of running a successful business. Join us as we discuss tax planning strategies to help your business get ready for tax season.

Planning to pay taxes is an important part of running a successful business. Business profits are subject to federal (and sometimes state and local) income taxes. As a new small business owner, you may only think about taxes after the fact, when you need to file a tax return. This may lead to missed opportunities to reduce your tax burden, control when you pay taxes, and strengthen your company’s financial picture.

Many tax planning strategies are available to entrepreneurs — some are aimed at your individual tax situation and some at the business itself. For example, you may be able to:

Take advantage of the qualified business income (QBI) deduction.

The QBI deduction allows owners of pass-through businesses to claim a deduction worth up to 20% of their share of the business’s income. There are several rules and limitations to claiming the QBI deduction, depending on whether your business qualifies as a “specified service trade or business,” your taxable income, wages paid by the business, and how much property the business owns. Your tax advisor can help you determine whether your business qualifies and estimate the potential tax savings.

Leverage net operating loss deductions.

Getting your business off the ground can be expensive, and some startups take a year or two to turn a profit. When your company’s tax deductions are higher than taxable income, you have a net operating loss (NOL), which you can use to offset taxable income in future years (or prior tax years, in some cases).

Claim valuable tax credits.

Tax credits are a dollar-for-dollar reduction in the amount of tax you pay to the IRS or your state revenue department. These tax credits are usually designed to “reward” business owners and individual taxpayers for certain activities, such as hiring workers, performing research and development, providing employee benefits, saving for retirement, and more. Identifying and planning for claiming these credits can dramatically improve your company’s bottom line by reducing your tax burden.

Postpone income or accelerate expenses.

Most small businesses use the cash method of accounting on their books and tax returns. Under the cash method, you recognize income when it’s received and expenses when paid, i.e., when cash changes hands. This could create tax planning opportunities.  If you anticipate being in a lower tax bracket next year, you may be able to defer income to next year to pay tax on that income at a lower rate. Likewise, you can accelerate expenses in the current year — such as pre-paying next month’s rent or next quarter’s property taxes — to reduce your taxable income this year.

Contribute to a retirement account.

Saving for your own retirement and setting up and contributing to a retirement plan for employees allows you to take advantage of potential tax deductions and credits this year and establish a solid financial foundation for you and your employees in retirement.

These are just a handful of ways that tax planning can help your business. Every tax situation is unique, so it’s important to discuss tax planning strategies with your adviser before making any significant moves. Decimal can help with your accounting operations as well as finding the best tax partner for your needs. Talk to us today to see what we can do for you! 

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