Nobody likes to think about taxes. But for many small business owners, it’s the most significant expense they incur each year. With just a little forethought, there are many things you can do to minimize it.
The first and most important thing to do, and as early as possible, is to meet with your accountant, review the year together, and make estimates for the remaining months. Make sure you’ve paid all your previous tax estimates—or change those estimates because you don’t want to overpay or underpay.
Also, take the time to ensure all your documentation is ready for your accountant to review and maximize your deductions.
“One of the things many of our customers overlook is keeping good travel records so they can take full advantage of the $0.585 per mile deduction granted by the IRS,” said Joanne Bryson, director at CPA Help Now in Norristown. “Especially in times of high energy costs, they miss out on considerable tax savings.”
Another strategy worth considering is buying capital goods such as furniture and fixtures, machinery and equipment, and even cars. Most companies can deduct up to $1,080,000 in expenses for these items, and the main requirement is that the asset be operational by the end of the year. That means even if you finance the purchase (and manage to defer your loan payments), you can still get the full purchase price deduction.
“Despite the potential for an economic slowdown, 2022 was a pretty decent year for many of our clients,” said Robert Simpson, partner at Springfield-based accounting firm Brinker Simpson & Company. “We advise them to pay out bonuses to their employees before the end of the year, if possible.”
Paying out bonuses not only lowers an employer’s taxes, but could also help retain key individuals during these labor-scarce times.
Ciro Adams, a Wilmington-based chartered accountant, recommends cleaning up your balance sheet, accelerating your spending and deferring income whenever possible.
“If you have long overdue accounts receivable from customers, take a close look and consider writing them off because you can’t get a tax deduction unless they’re removed from your balance sheet,” he says. “The same goes for inventory — go around and get rid of any old stuff lying around so you can write those amounts off your balance sheet, too.”
If you report income and expenses as you receive and spend cash, then you are a payment-based taxpayer. For those taxpayers, Adams also recommends looking for expenses like insurance and other purchases that you can expedite this year to make the deduction. “Conversely, if you’re able to defer cash collections until 2023, that move will help reduce your income in 2022,” he says.
If your company has a 401(k) plan, you and your employees can save up to $20,500 tax-free this year, provided your company complies with IRS “discrimination” rules (this check is designed to ensure that high-paid individuals do more than other employees contribute), you and your employees can earn up to an additional $40,500 in tax-free Matching Contributions. People over 50 can get even more. The employer subsidy can be paid until April 18, 2023 for the calendar year 2022.
If you have a regular Individual Retirement Account, or IRA, you should consider converting to a Roth IRA. “Due to the declining markets, many of our clients are doing Roth IRA conversions this year,” says Simpson. “They pay taxes on the conversion, but the tax bill is lower because the wealth has gone down. Once you put the money into a Roth IRA, the appreciation in the value of those assets is no longer taxable.”
Many business owners I know have outside investments that have sadly fallen in value this year along with the stock market. If you are one of them, you should consider selling some of these investments and offsetting those capital losses against any capital gains so you don’t have to pay tax on the gains. If your capital losses exceed your capital gains, you can also offset up to $3,000 of those excess losses against your ordinary income. Under IRS rules, you must wait 30 days if you wish to repurchase any of these shares or you will be subject to penalties.
Finally, think about 2023. If you combine your personal and business transactions in one bank account, you should open a new bank account and separate those transactions for better reporting. If you only report your business income on your personal tax return using Schedule C forms, it may be a good time to incorporate yourself and form a new tax-filing entity such as an S corporation or partnership. This allows you to separate your business and personal financial activities, get more legal protection, and accept payouts instead of salaries to lower your taxes.
“If you’re an S corporation, you can pay yourself a reasonable salary and then take distributions, so you can potentially avoid the 15.3 percent self-employment tax,” Bryson says. “It could be a significant saving for 2023.”