December 4, 2022

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Making these tax moves 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 come tax time.
  • Accelerate or defer income to pay taxes when you are in a lower tax bracket.

As a small business owner, it’s important to stay on top of the latest tax strategies so you can minimize your tax liability. One way to do this is by tax planning. Tax planning is the process of identifying tax strategies to minimize your tax liability. With the new year just around the corner, now is a good time to review some of the key tax moves you should make before 2023.

RELATED: Best Tax Software

1. Maximize your retirement savings

Not only will your future self thank you for saving for your golden years, but you can save on taxes along the way. There are several retirement savings plans available to 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 taxes on investment earnings until withdrawal.

The 2022 contribution limits to a 401(k) is $20,500. For a SEP IRA, contributions are limited to 25% of your net earnings from self-employment (not including contributions for yourself), up to $61,000 for 2022. For a SIMPLE IRA, employees are allowed to make contributions out of their salaries of 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 and older).

2. Review your business structure

Are you still using the same business structure you started with? If so, it may be time to reevaluate whether it’s still the best option for your business. For example, if you’ve grown significantly since starting your business, you may want to consider converting to a C corporation.

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

3. Maximize your deductions

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

For example, if you use your car for both business and personal use, you can only deduct the portion of the expense that is related to your business use. If you have a home office, you can deduct a portion 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 make, and other expenses that make people more aware of your business can be deductible.
  • Business insurance: Any liability insurance, worker’s comp, errors and omissions, etc., can be deductible.
  • Professional services: Hiring a professional to help you with marketing, a business attorney, an accountant, and more can be deductible.
  • Travel expenses: Any travel related to your business can be deductible, so keep track of all your receipts and expenses.

4. Income deferment or acceleration

Income is taxed in 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? In order to lower your tax burden for this year, defer any income you can to next year. For example, if you operate on a cash basis, you can send invoices in January 2023. Money you get then won’t be taxable until 2024.

If, however, you want to lower your taxes for next year, take as much income in 2022 as possible. Ensure you get all your billing in before the end of the year. This may lower the income you claim in 2023, when your income tax may be higher. It makes sense to defer income if you think you will be in the same or a lower tax bracket next year. You don’t want to defer income if it could push you into a higher tax bracket. If that’s the case, you may want to accelerate income this year so you can pay taxes while in a lower bracket now, instead in a higher bracket later.

Tax planning is an important part of running a small business. By taking advantage of these strategies, you can minimize your tax liability and keep more of your hard-earned money. Keep up 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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