The Essential Guide to Tax Planning for Business Owners

Paying taxes can be one of the most stressful duties of small business owners, but it’s also one of the most important. You need smart tax planning strategies to ensure a smooth fiscal year-end, comply with tax laws, minimize tax liabilities, and maximize growth.

This guide provides actionable strategies to help you efficiently manage your tax obligations and pave the way for long-term success.

Step 1: Understand Your Tax Obligations

Small business owners often think of federal income taxes at year-end, but those are just one piece of the puzzle. You may also be responsible for payroll, property, state and local income, sales, excise, and self-employment taxes.

Each type of tax has specific rules, rates, filing requirements and deadlines. Make sure you’re aware of all the ways you pay taxes and when they’re due so you can plan for them and avoid penalties.

If you operate on a calendar year, your federal income tax filing deadline is generally March 15th if your business structure is a partnership, multi-member LLC, or S corporation. C corporation, single-member LLC, and sole proprietor taxes are generally due on April 15.

Tax filing deadlines are a little more complicated for businesses that operate on a fiscal year-end. Federal tax returns for C corporations are typically due on the 15th day of the third month after the end of the fiscal year, while partnerships and S corporations have their returns due on the 15th day of the fourth month.
If any deadlines fall on a weekend or holiday, the due date shifts to the next business day.

State and local income taxes may have the same deadlines as federal returns, but not always. So, it’s a good idea to work with a tax advisor who understands your tax filing obligations and helps you stay on top of your filing obligations.

Step 2: Maintain Accurate and Organized Records

Any tax strategy worth the paper it’s written on starts with accurate accounting.

Invest in reliable accounting software or a trustworthy outsourced accountant to streamline the record-keeping process and ensure you record all business income and expenses. Regularly reconcile bank statements, accounts receivable, and accounts payable to identify discrepancies and ensure your financial records are accurate.

When your bookkeeping is accurate and up-to-date, you can run a balance sheet and income statement, also known as a profit and loss report, at any time to see where you stand and estimate your tax liability. Then, your tax advisor can help you evaluate strategies and leverage tax benefits.

For example, you might be able to defer income to next year or accelerate business expenses into this tax year to reduce your taxable income. Owners of limited liability companies (LLCs) might be able to reduce their self-employment tax burden by making an S corporation election.

On your personal tax return, you might look for opportunities to lower your adjusted gross income, like selling losing stocks to take advantage of tax loss harvesting, contributing to a workplace retirement plan, or bunching several years’ worth of charitable contributions into one year to benefit from itemized deductions.

These moves may help you save money, but it’s not a given. You need accurate and accessible financial records to run the numbers and decide whether it makes sense.

Step 3: Maximize Deductions and Credits

Tax deductions and tax credits both reduce your tax bill, but they do so in different ways.

Tax Deductions

A tax deduction lowers your taxable income, so the amount of tax savings depends on your tax bracket. For example, if you’re in the 22% tax bracket, a $1,000 tax deduction saves you about $220 in taxes.

Many business expenses qualify for a tax deduction. The key is they must be “ordinary” and “necessary.” Ordinary expenses are those that are common and accepted in your industry. Necessary means it’s helpful and appropriate.

The types of business expenses you can deduct depend on your industry and operations, but some common examples include:

• Advertising and marketing costs
• Salaries and wages
• Office supplies
• Rent
• Business insurance
• Bank fees
• Legal and professional fees
• Utilities
• Charitable donations

Tax Credits

A tax credit is a dollar-for-dollar reduction in the amount of tax you owe. So, if you owe $5,000 in taxes, a $1,000 credit will reduce your tax bill to $4,000. Some tax credits are refundable, meaning if they reduce your tax bill below zero, you can get a refund over and above the amount you paid in for the year.

Again, the tax credits available to your business depend on your operations, but some available tax credits for businesses include:

• Work Opportunity Tax Credit
• Research and Development (R&D) Credit
• Credit for Builders of Energy-Efficient Homes
• Clean Vehicle Credits
• Employer-Provided Child Care Credit

Work with your tax advisor to identify potential tax deductions and credits.

Step 4. Accelerate Depreciation

Typically, business owners can’t write off the cost of large purchases like commercial buildings, equipment, furniture and fixtures, and commercial vehicles in the year they paid for them. Instead, they capitalize the asset — i.e., add it to the balance sheet as a fixed asset.

Depreciation is the process of deducting the cost of those assets over their useful lives.

Most fixed assets must be depreciated over 5 to 39 years for federal tax purposes. However, there are a few ways to accelerate depreciation on certain assets.

Section 179

The Section 179 deduction allows you to deduct the total purchase price of qualifying equipment and software placed in service during the tax year.

Bonus Depreciation

Bonus depreciation allows you to immediately deduct a large percentage — 60% for 2024 — of the cost of eligible assets. Bonus depreciation is available for both new and used property and can be used in conjunction with the Section 179 deduction.

Your tax advisors can help you calculate depreciation on new assets and leverage your write-offs.

Step 5. Maximize Retirement Plan Contributions

Whether you’re a solopreneur or an established business owner with dozens of employees, saving for retirement is a great way to reduce taxable income.

Setting up a retirement plan like a 401(k), SEP IRA, or SIMPLE IRA provides tax advantages. Contributions made by the business and participants are tax-deductible, and they offer much higher contribution limits than a Roth IRA or Traditional IRA. These plans also help attract and retain employees.

Your financial advisors can help you decide which type of retirement plan is right for you. If this is your first time offering an employer-sponsored retirement plan, the Retirement Plans Startup Costs Tax Credit can help offset the costs of setting up and administering the plan.

Step 6: Seek Professional Advice

Tax laws are complex and constantly changing, but a qualified tax professional can help keep you compliant while offering valuable insights to lower your tax liability.

While year-end tax planning can be valuable, don’t wait until December to start thinking about taxes. Contact Percipio Business Advisors today to schedule a tax planning session. We can help you get caught up on your accounting, review financial statements, estimate business tax liabilities, and recommend strategies to lower your taxable income and provide peace of mind as tax time approaches.

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