Tax Planning Strategies for Business Owners

by | Nov 14, 2022 | Bookkeeping & Accounting

Limited Liability Company LLC

As a business owner, you know that taxes are a fact of life. But just because taxes are inevitable doesn’t mean that you can’t take steps to minimize your tax bill. By incorporating some good tax planning strategies into your business plan, you can save yourself a lot of money come tax time. Here are a few common tax planning strategies that all businesses can consider.

Utilize Depreciation.

One way to save on taxes is to take advantage of depreciation deductions. Depreciation is an accounting method that allows businesses to deduct the costs of certain properties and equipment over time. Depreciation deductions are taken over the useful life of an asset, which means significant tax savings in the long run.

Section 199A and the 20% Pass-Through Deduction.

The new Tax Cuts and Jobs Act created a 20% pass-through deduction for qualified business income from pass-through entities. Such entities include sole proprietorships, partnerships, LLCs, and S corporations. This deduction is available to businesses with taxable income below $315,000 for married couples filing jointly. Similarly, $157,500 for all other taxpayers.

Timing Considerations.

Another important consideration when it comes to taxes is timing. By timing your income and deductions strategically, you can lower your overall tax bill. For example, if you know you’re going to have a large expense in the upcoming year, you might wait to incur those expenses until after Jan. 1. Doing so, they can be deducted from your next year’s taxes.

Accounting Method Planning.

The accounting method you use can also have an impact on your taxes. If you use the accrual method of accounting, you can deduct expenses as soon as they’re incurred. Even if you don’t actually pay for them until later. On the other hand, if you use the cash method of accounting, you can only deduct expenses when they’re actually paid for.

Utilize Charitable Contributions.

Making charitable contributions is a great way to reduce your tax bill while also supporting causes that are important to you. Though, it’s important to keep good records so you can document your donations come tax time.

Pass-through Entity Taxes.

If your business is a pass-through entity you’ll need to be aware of the new pass-through tax deduction. This deduction was created by the Tax Cuts and Jobs Act. The main feature is that it allows business owners who qualify to deduct up to 20% of their qualified business income on their personal tax returns. In order to qualify for this deduction, though, businesses must meet certain requirements regarding their income levels and types of business activity.

So it’s important to consult with your accountant or tax attorney before assuming that you’ll be able to take advantage of this deduction. It’s also worth noting that the pass-through deduction is set to expire at the end of 2025. So it may only be available for a few more years.  Therefore, if you think you may benefit from the pass-through deduction in the future, it may be advisable to act sooner rather than later.  For more information about how the pass-through deduction works, check out this article.

These are just a few of the many tax planning strategies that business owners can use to lower their overall tax bills. By taking advantage of depreciation deductions, strategic timing, and pass-through entity taxes, you can save yourself a lot of money come tax time. However, it’s important to consult with your accountant or tax attorney before implementing any major changes to your taxation strategy. As they will be able to advise you on which approach will work best for your individual situation. As Startup Tandem, we have a team of experts that may guide you through this process. Visit our website to learn more about how we can help you with your taxes.

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