Learn how to stay legal and compliant while optimizing your business taxes.
Discover our tax professionals’ best advice for optimizing your taxes through deductions, plus key tax laws every business owner needs to follow to stay safe and legal.
With business owners feeling the squeeze of inflation, labor costs, and growing expenses, many are looking for ways to effectively optimize their taxes, reducing their business’ tax burden.
However, this gets complicated as soon as you start reviewing the Internal Revenue Code (IRC), which we do not recommend for light, easy beach reading.
At more than 3.5 million words, you might call it lengthy.
Not only is it complex, trying to interpret tax laws, understand deductions, and file taxes on your own is a proven way to pay the wrong tax amounts—too much or too little—and become the subject of a tax audit.
Tax laws, deductions, incentives, credits, and limits vary each year, even by industry and location, so it’s easy to get it wrong.
That’s why we’ve consulted our brilliant tax professionals to provide you with some valuable advice; their years of experience helping small business owners has made them experts at optimizing small business taxes.
What do they advise keeping an eye on for your small business taxes? Find out below.
Even if you never intend to prepare your own taxes, being aware of tax laws and common sources of compliance errors can help prevent headaches later. Taxes impact every detail of your business, from HR to purchases to banking and more, so the risk of not understanding taxes, even at a high level, can create large issues.
Here are 4 tax matters that are often sources of errors and tax audits:
Attempting to avoid payroll taxes, benefits, and other requirements, businesses may classify a worker as an independent contractor, not an employee.
However, the IRS keeps an eye out for worker classification errors, comparing your classifications with similar businesses and previous tax years. The consequences can be major, including back taxes and fines. Always ensure you properly classify your employees because it’s the legal, ethical thing to do—and a great way to keep employees happy with proper, fair employment.
Your business has to withhold and set aside payroll taxes, including FICA and Federal income tax to fund Social Security and Medicare, plus state and local payroll taxes, where applicable.
By failing to file, miscalculating amounts, or even paying late can quickly trigger a response from the IRS given the importance of the programs funded by these taxes.
Yes, even a business owner has to contribute to payroll tax, paying self-employment tax. Social Security tax (12.4%) impacts the first $168,600 of self-employment income while Medicare tax (2.9%) has no cap on income. Typically, self-employed people pay a combined 15.3% tax rate.
Small business owners may think they’re playing it smart by claiming personal expenses, like meals, entertainment, and vehicles, as business expenses. However, the IRS has a solid track record of sorting out the difference between a $500 client dinner and a $500 “client dinner”.
If it’s found out you’ve been expensing personal items, you’re likely to face fines and back taxes, among other penalties.
Your best bet (and the only legal route) is to keep personal and business separate. If there are expenses that walk the line of personal and business, or you think there’s a case to be made for a certain expense, this is where it’s wise to consult a trusted tax professional who can give you a legal answer.
Due to its complexity and highly specific eligibility requirements, this deduction often triggers a tax audit or IRS review. Since the max deduction is 20% of your qualified business income on your taxes, it’s claimed frequently.
But scroll through the IRS’ language on the Qualified Business Income Deduction and you’ll quickly find complex terms, including 14 items that are ineligible for QBID—though you’ll need to do substantial Googling to determine what they are, whether they apply to you, and what it means.
For these reasons, our professionals list the Qualified Business Income Deduction as a fantastic opportunity—but only when you can be sure you qualify. Just like any tax error, the penalties are substantial.
Although we just covered complex and consequential tax laws, there’s good news. Our tax professionals have put together their top 4 money-saving deductions that many businesses may be eligible for.
Having insurance not only reduces your risk of major out-of-pocket expenses, it can also bring some helpful tax deductions. From liability insurance to property insurance to workers’ comp insurance, you have a few ways to take advantage, protecting your business in multiple ways.
Better yet, your health insurance premium as a self-employed person may be deductible, however, check with a trusted tax professional to make sure you fit the criteria.
Yes, these revenue producers are actually tax deductible, from social ads to a website overhaul to agency retainers.
If you’ve been holding back on promoting your business due to cost, here’s one more reason to start investing in your company’s advertising and marketing efforts; you can even deduct the cost of “advertising or promoting goodwill”, providing food and entertainment to your community members.
But you should know: the IRS says the costs must be “an ordinary expense…one that is common and accepted in the industry”. Also, it must include “reasonable advertising expenses…directly related to the business activities”.
A solid social media campaign will likely pass through the IRS without issue, but promoting your business with a $150,000 sponsorship of a roller derby team or monster truck rally might raise scrutiny, especially if it’s difficult to explain the connection between these events and your business.
This is where a tax pro comes in handy: you can consult with them to understand any deduction risk to your planned advertising and marketing strategy.
Unfortunately, most everything in your business depreciates and loses value. However, depreciation on furniture, vehicles, equipment, and machinery may qualify as a tax deduction, according to Section 179, meaning you can use those losses to generate tax savings.
A few caveats apply. The depreciating item must be owned by the business, must be used to produce taxable income, have at least a one-year lifespan, and not be among items that cannot be depreciated, which the IRS clarifies further.
How much of a deduction can you take from depreciation? Using Form 4562 from the IRS, you can determine an approximate amount. However, consulting a professional will ensure you maximize your deduction while minimizing your risk of claiming too much or depreciating ineligible assets.
You probably know you can deduct salaries, bonuses, commission and benefits from your taxes, like health insurance and retirement contributions.
But what you may not know is that you can minimize your tax burden while becoming a magnet for great talent, helping you attract and keep great employees.
By offering awesome benefits—including paid leave, tuition reimbursement, achievement awards and resources—you can reduce your taxable income.
While erasing staffing headaches, you can save big. For example, if you have a written policy regarding medical leave for employees, you can earn a tax credit from 12.5% to 25% of the employee’s leave; however, consult a tax pro to understand how to establish this policy and be eligible for the tax credit.
What’s not to love about saving money while making employees’ lives better—and having a team that will help grow your business?
As you might’ve gathered, the key to maximizing your tax savings is dead simple: strategize your finances and claim relevant deductions.
Of course, doing this in practice is a whole lot more complicated as taxes vary from year-to-year or even by location and industry. Even who the business owner is, or the people they employ, can have a major impact on how much is paid or deduction eligibility.
So, knowing which deductions to claim, when, and for how much is like hitting a moving target, especially for those without the time and/or expertise of small business taxes.
However, LedgerWay’s tax professionals are here to help you both optimize your taxes and minimize your risks of overpaying, underpaying, tax audits, and losing time on tax prep.
And they do it at a price even small business owners can afford.
If you’d like to see how much you can save next tax season, plus get an expert’s input on your current taxes, schedule a call with LedgerWay.
National Business Development & Sales Manager
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