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- January 10, 2024
Maximizing Tax Deductions for Small Businesses
When you are running a small business, it’s important to identify every opportunity to cut your operational costs. One of the best ways to do this is by utilizing the various tax deductions available. The best part? You cut your operational costs without impacting your efficacy or cutting corners. But how exactly can you do that?
Well, here’s a complete tax deduction guide for small businesses from our experts at CROWNGLOBE. So without much adieu, let’s get started. But first, a little bit of the basics.
What are Tax Deductions?
Tax deductions are an opportunity offered by the Government to reduce the tax burden on small businesses. Under this rule, businesses are allowed to deduct certain expenses from their income. Result? It can slash their taxable income, and hence they will have to pay a little less tax. More importantly, the deductions do not reduce the tax liability in the ratio 1:1; instead, they reduce the overall tax liability. So there are a lot more savings than businesses realize.
Now let’s take a look at some practical strategies that you can implement to maximize your deductions.
Practical Strategies for Maximizing Deductions
Bookkeeping
Bookkeeping is an integral part of any business. And when you want to claim deductions, it’s the first thing to do. When you have a detailed record of where your money is going and what items you are spending it on, it becomes easier to claim deductions. You can use simple software or, even better, hire bookkeeping experts like CROWNGLOBE to do all the heavy lifting.
Making 401(k) and HSA Contributions
401(k)s and Health Accounts (HSAs) are an excellent way to save money and claim deductions. And if you are registered Savings as a pass-through entity like a single-member LLC, it’s even better. These contributions can reduce taxable income and bring down your overall tax liability.
Postponing Income
This is a smart step that only a few businesses leverage, as they don’t know this! You can defer your income to the next year for efficient tax planning. How do I do it? Well, just delay your invoice generation or talk to your clients about paying after the end of the year. This can help you postpone your income and transfer your current tax burden to the next year. And in the next year, you can make some other arrangements to set off this income! Pretty smart move, right?
Paying Business Expenses Early
Businesses can claim tax deductions on certain business expenses. So How about purchasing the inventory right now that you will need next year? Or how about getting a certain service contract for the next year done this year? These expenses will be considered your business expenses for the present year and you can claim a tax benefit on them!
Managing Capital Losses
A lot of businesses don’t realize that they can use their capital losses to offset capital gains. This can be a great way to reduce your tax liability. So, even if you lose money in terms of capital loss, you can gain somewhat in the form of tax deductions! As of now, businesses can claim up to $ 3,000 per year ($1,500 if married filing separately). The best part? If your losses are above $ 3,000, you can carry forward that loss to the next year and offset it against the profit of the next year.
Office Expenses Deductions
Office expenses take up a large chunk of annual spending for any business. So make sure you do not forget to claim tax deductions for those expenses. These expenses include the cost of suppliers, utilities, and rent. In some cases, you can claim a home-office deduction too. But it’s better to consult tax experts before making any decision as there are certain regulations about these deductions.
See? There are so many ways you can slash your tax liability by taking a few simple steps. All you have to do is keep accurate records, understand the taxation laws and of course, consult a Tax Professional.
Why It's Critical to Consult a Tax Professional?
Tax rules and regulations keep changing almost every year. And honestly, it’s not possible for SMB owners to stay updated about each change. Would you like to spend your time understanding taxation laws or would you prefer focusing on your own business? The choice is obvious! And that’s why it’s always better to consult a Tax Professional. They constantly deal with those changes and are experts in the matter. On top, you do not want the IRS on your back for mistakenly claiming a tax deduction that’s not legal! So a better choice? Consult a tax professional like CROWNGLOBE.
Key Tax Changes in 2023
- Business Meal Deductions: Reduced to 50% in 2023 from 100% in 2022.
- Employee Retention Tax Credit: No longer available from the 2022 tax year.
- Bonus Depreciation: Starts phasing out in 2023, reduced from 100% to 80%.
- Retirement Plan Tax Credit: 100% credit for starting a retirement plan, up to $5,000, for businesses with up to 50 employees.
- Inflation Reduction Act Incentives: Includes increased deductions for energy-efficient commercial buildings and tax credits for electric or fuel cell vehicles.
Wrapping Up
There are multiple tax deduction options available for small businesses. But it’s very important to stay in line with the legal compliances while claiming these deductions. So it’s always better to connect with professional experts like CROWNGLOBE and save more, the right way!
For any further information, feel free to reach out !!
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