8 tax tips for small business owners

Small business owners are often looking for ways to minimize their company’s tax liability. That may mean evaluating the company’s current financial performance and adjusting its tax strategy accordingly, taking advantage of tax-friendly pass-through provisions or setting up a retirement plan for its owners and their employees.

Whatever the situation, year-end tax decisions could have a significant impact on a business’s tax picture now and for years to come. While working with a tax advisor, business owners should consider whether the eight strategies below could help.

1. If it’s been a down year, consider deferring expenses and accelerating income

If a company operates on a cash basis for tax purposes and

• Profits seem likely to be lower this year — and the business is expected to be more profitable next year — consider accelerating cash collection before Dec. 31 and delaying paying expenses until after the new year. Income realized this year may be taxed at a lower rate, and deductions may be more valuable if income is higher in the new year. “If a net operating loss is expected this year, keep in mind that carrying that loss forward to offset income in future years and potentially lower taxes then, may be an option” Navani suggests.
• The business has had an especially strong year and profits are expected to be high this year, consider whether deferring revenue recognition to the following year is an option (depending on when cash payments are received), and increase this year’s expenses by paying some of the following year’s costs in advance, he advises.

2. Making gifts to family

“For many owners, the business is not just their largest asset, it’s the one that’s growing fastest in value each year,” Navani says. The current high gift and estate tax exemptions are set to drop at the end of 2025 to the 2017 base level of $5 million for individuals, $10 million for couples (indexed for inflation). Business owners may want to start considering now how to transfer some of that wealth to beneficiaries before the deadline arrives. Depending on the age of the children in the family, the vision for the business and other factors, business owners have plenty of options, Navani adds. For example, gifting non-voting shares to younger beneficiaries could move assets out of the estate now, without giving children a say in management before they’re ready. Yet enacting such decisions takes time, he cautions. So speaking with a tax advisor soon about which approaches might make sense for a business and family is recommended.

3. Understand the tax implications of remote-working employees

Offering remote work as an option may help business owners to retain key employees and cast a wider net for talented new ones. Yet as the practice morphs from a pandemic necessity to a permanent part of the business landscape, owners need to be aware of and plan for tax implications, Navani cautions. “Make sure the business is compliant with all the payroll tax and state filing obligations,” he suggests, even if relocating within the United States. If relocating to another country, the situation may become more complex. “For example, if an employee relocates from New Jersey to India, the employer needs to understand the Indian rules and responsibilities imposed on the employer,” he says. A tax advisor can help sort through and meet these obligations.

4. Determine whether the business may qualify for different tax treatment

Many small business owners can deduct 20% of qualified business income in calculating their federal taxes — “but it’s not automatic,” Navani says. The deduction generally applies to income from “pass-throughs” (when owners pay taxes on business income themselves, rather than the business itself paying tax). However, the law does not generally allow the deduction for certain service businesses, such as legal, medical or accounting practices. A tax specialist can help explain which tax laws and deductions apply to a business.

5. Create a smart plan for paying taxes

The sooner business owners have an idea of the business’s general outlook for the tax year, the better prepared they are to prevent cash flow disruptions — either by putting money aside or arranging for a line of credit to pay the IRS. “Many businesses have faced higher costs due to inflation,” Navani says. “Thinking ahead about what they’ll owe next April could prevent them from facing liquidity problems at tax time.”

One possibility to consider if the qualifications are met: Estimated taxes can often be based on the prior year, so if the business had a down year, paying a relatively low amount of estimated tax for this year to preserve cash flow is an option. Make sure to pay at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller, to avoid any penalties. Of course, the full remaining amount would be due by the IRS tax deadline in 2024. Business owners should work with an accountant to estimate the tax due, so they can invest the difference and be potentially better prepared for the eventual payment.

6. See whether pass-through entity status could help reduce taxes

Many states have enacted pass-through entity (PTE) taxes as an IRS-approved work-around to the $10,000 limitation on state and local tax deductions as part of the Tax Cuts and Jobs Act of 2017.¹ Generally, a qualified PTE entity, such as an S corporation, partnership, or an LLC taxed as either of the two, can make an election to pay a PTE tax at the entity level on behalf of the owner’s/partner’s share of their qualified net income from the entity.

If the election is made and the PTE tax is paid, this will generate a tax deduction on the entity’s federal return, thereby reducing the taxable income reported on the owners/partners federal K1. Here’s an example of how it can work: If an S corporation has $1 million worth of income and the ultimate state tax is $60,000, that amount is considered an expense, so that the S corporation’s income for federal tax purposes becomes $940,000. Thus, the business owners are able to receive a tax deduction and ultimately pay less federal taxes, thanks to the PTE benefit. Additionally, the PTE paid will generate a tax credit to owners/partners that elect to participate in the PTE election and can be used to reduce their personal state income tax. It is necessary to check if the state where the business operates has any limitations on utilizing these PTE credits. “Since 2017, more and more states have adopted these provisions,” Navani says. “If the business is an S corporation, be sure to speak with a tax professional about the state’s policies.”²

7. Set up — or add to — a retirement savings plan

Small business owners generally have several options for employer-sponsored retirement savings plans, including SIMPLE IRA, SEP IRA, 401(k), and profit-sharing plans. The plans differ in the amount the employer and employee can contribute, the investment options available, and the ease and expense of setting them up, among other factors. Small business owners may also set up personal IRAs for themselves.

With any plan, contributions the business owners make to themselves and their employees may be tax-deductible. Small businesses may also get a tax credit to help defray the cost of starting certain retirement plans. For calendar year taxpayers, they are generally given until the due date, including extensions, of the small business’s tax return to contribute funds to a retirement plan. But some types of plans must be established before the end of this year, or earlier during this year, to get the tax deduction. It’s recommended to ask a tax advisor. To learn how much one can contribute to a retirement plan, refer to our annual contribution limits guide.

8. Consider equipment deductions and green energy tax credits

Buying new or used equipment for a company and placing it in service before December 31, 2023, may entitle a business to elect to expense the purchase and claim a federal income tax deduction for 2023. As the law currently stands, the benefit still exists for future years, adjusted for inflation. The aggregate cost of property that a taxpayer elects to treat as an expense cannot exceed $1,160,000. Because the deduction is intended for small businesses, it starts to phase out at spending amounts starting at $2.89 million, ending at $4.05 million. When planning a purchase, consider your timing carefully, Navani advises. “If it’s been a challenging year financially and better results are envisioned in the year to come, consider holding off that purchase until the start of the year, giving the business a potential deduction for next year, when the tax bill could be higher.”

But the choice will have to be weighed against other incentives favoring investing in new equipment now, he adds. Bonus depreciation, set at 100% in 2020 during the pandemic, is steadily dropping each year—from 80% in 2023 to 60% in 2024. “So, if debating whether to buy a new piece of equipment, it could make sense to buy it now and get it set up and running before the end of the year in order to get that 80%.”

Now may also be a time to consider green improvements for the business. The federal Inflation Reduction Act, signed into law in August 2022, includes nearly $400 billion for clean energy tax credits and other provisions aimed at combating climate change. These include potentially thousands of dollars in tax credits for buying new or used electric or hybrid clean vehicles, installing residential energy property, and other steps. Restrictions apply, so check with a tax advisor on which credits might be available to you, Navani suggests.