Tax season is right around the corner, and small business owners everywhere are looking for ways to save on taxes, secure their finances, and build wealth. While many people wait until tax time to think about deductions, year-end tax strategies can offer some of the best opportunities to reduce tax liability and plan strategically. Below, we dive into 25 effective strategies for small business owners, covering everything from retirement contributions to payroll management to investment choices.
1. Retroactive S-Corp Election
If you’re running an LLC and made more than $40,000 this year, think about a retroactive S-Corp election. This allows you to save on self-employment taxes by choosing to be taxed as an S-Corporation. This strategic move can lead to big savings if you meet IRS guidelines (IRS, 2023).
2. Maximize Payroll if Operating as an S-Corp
If you're running an S-Corp, make sure your payroll is set up correctly. The IRS requires "reasonable compensation" for S-Corp owners. Managing this properly helps you avoid penalties and maximize your deductions, which can save you both money and time (IRS Publication 15-B, 2023).
3. Focus on Revenue Generation
Still in startup mode? One of the best ways to optimize your taxes is simply to make a sale. Generating income means you can apply various business deductions against that revenue, which can help improve your year-end tax position.
4. Conduct a Year-End Board Meeting
Take advantage of family gatherings by turning them into a business board meeting. The IRS allows business deductions for meals and travel during official business meetings, so document these discussions and related expenses to make them count.
5. Set Up a Health Savings Account (HSA)
An HSA is a great way to reduce taxable income. Paired with a high-deductible health plan, HSAs let you make tax-free contributions and withdrawals for medical expenses, effectively lowering your taxable income (IRS, 2023).
Strategies for Growing Businesses
6. Review and Consolidate Business Entities
If you have multiple entities, it might be time to dissolve any that no longer serve your business goals. Consolidating your structure can help reduce administrative costs and make tax season easier and more efficient.
7. Take Advantage of Flexible Spending Accounts (FSA)
Remember that FSAs often have a “use-it-or-lose-it” policy, so make sure you use up any remaining balance by year-end. FSAs can cover eligible healthcare expenses, helping you get the most out of your tax-free savings.
8. Hire Your Kids
Hiring your children under 18 can lead to significant tax savings. You can pay them wages that are tax-deductible for your business, and the wages are often tax-free for the kids. It's a family-friendly strategy that also helps build generational wealth (IRS guidelines).
9. Consider a Solo 401(k)
Self-employed? A Solo 401(k) lets you contribute both as an employer and an employee, which maximizes retirement savings while providing significant tax deductions.
10. Purchase Business Assets Before Year-End
Think about buying essential assets, like computers or other equipment, before December 31. Thanks to Section 179 deductions, you can fully expense these purchases in the current tax year, reducing your taxable income (IRS, 2023).
Tax-Reducing Strategies for Established Businesses
11. Organize Your Books and Financial Records
Good bookkeeping is crucial. Whether you use QuickBooks or a simple spreadsheet, having accurate records helps you identify deductible expenses, saving time and money. Take some time before year-end to categorize your expenses and reconcile your accounts.
12. Shift Income and Expenses Strategically
To manage taxable income, consider shifting income and expenses by deferring payments until January or accelerating deductible purchases. For example, buy office supplies in December and put them on a credit card to claim the deduction for this year, even if you don’t pay the bill until January.
13. Implement a Health Reimbursement Arrangement (HRA)
HRAs allow business owners with high medical costs to reimburse themselves tax-free for qualified expenses. These are ideal for covering significant healthcare expenses without adding to your tax bill.
14. Employ Older Children
If your kids are 18 or older, consider employing them. They can fund a Roth IRA or other tax-advantaged accounts, which helps them build long-term wealth and provides a tax benefit to your business.
15. Reevaluate Spousal Payroll
Putting a spouse on payroll can sometimes lead to higher payroll taxes. In many situations, it’s better for one partner to handle payroll while the other takes a stipend, especially if retirement contributions are the main goal. Planning carefully can help reduce unnecessary tax withholdings.
16. Hire Grandchildren, Nieces, or Nephews
Hiring young family members by issuing a 1099 to their parents allows them to earn tax-free income up to $13,850. It’s a smart way to transfer wealth within the family while also saving on taxes.
Strategic Investment Moves
17. Roth Conversions
Consider converting traditional IRAs to Roth IRAs to take advantage of tax-free growth and withdrawals down the line. Work with your tax advisor to make sure you don’t accidentally push yourself into a higher tax bracket when converting larger amounts.
18. Leverage Charitable Contributions
If you’re planning to donate to charity, think about donating appreciated assets like stocks. This strategy lets you maximize your deduction and avoid capital gains taxes on those donated assets.
19. Real Estate Investment and Depreciation
Investing in rental properties, especially short-term rentals like Airbnb, could qualify you for bonus depreciation and other deductions. If you’re closing on a property before year-end, you may unlock additional tax benefits (IRS guidelines).
20. Review Quarterly Estimated Payments
Make sure you’ve made the correct estimated tax payments for the year. Underpaying can lead to IRS penalties, so being proactive now can help you avoid an unexpected bill in April.
21. Oil and Gas Investments
For higher-income earners, oil and gas investments offer deductions through depreciation on drilling costs. It’s a good strategy for those in higher tax brackets looking for long-term asset appreciation.
Final End-of-Year Moves
22. Consider 529 State Tax Deductions
If your state allows contributions to any 529 plan, these educational savings plans offer tax-deferred growth for future college expenses. Just check your state’s rules, as some require you to contribute to a state-specific plan to qualify.
23. Prepare 1099 Forms for Contractors
Start collecting W-9s from contractors now so you can file 1099s on time in January. Filing accurate 1099s keeps your business protected from IRS penalties and ensures proper deduction claims for contractor expenses.
24. Offset Gains with Capital Losses
If you have capital gains, consider selling underperforming stocks to balance those gains and reduce your taxable income. This approach is especially helpful in volatile markets and can help minimize tax liabilities.
25. Charitable Remainder Trust (CRT)
A CRT can be a powerful tool if you have appreciated assets you plan to sell. CRTs offer an immediate tax deduction, provide lifetime income, and help you avoid capital gains taxes on the sale, all while giving back to your favorite causes or charities.
These strategies cover everything from simple tax moves to advanced planning techniques, designed to fit the needs of small business owners at various stages. As year-end approaches, being proactive can make a huge difference in your tax savings and help you build a solid foundation for wealth in the coming year.
Whether you’re a startup founder or a seasoned entrepreneur, incorporating some of these strategies can help you reach your financial goals.
Ready to get started on your tax-saving journey? Reach out to a tax advisor today to find the strategies that work best for your business and financial situation.
References
IRS. "Retirement Topics - Contributions." irs.gov, 2023.
IRS. "Section 179 Deduction." irs.gov, 2023.
"Tax Planning for Small Business Owners," Entrepreneur Magazine, 2023.
IRS. "Publication 15-B, Employer’s Tax Guide to Fringe Benefits." irs.gov, 2023.
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