Six Tips for Small Business Owners to Reduce Taxable Income

If there was ever a time to reduce taxable income for your small business, it’s now. With the high costs of goods and services, fueled by out-of-control inflation, consumers are tightening their belts like never before. That means it could be harder to persuade online users to buy what you’re selling. So, as a small business owner, you don’t want to leave any stone unturned when it comes to lessening your tax liability. You need to hold onto as much of your revenue as possible while boosting your bottom line. It would be ideal if you could take advantage of small business tax breaks that could reduce taxable income from your profits. 

Let’s look at six practical and easy-to-implement steps that are designed to reduce your business’s taxable income. 

6 Best Ways to Reduce Your Business Taxes

1. Save for Retirement

You are likely to enjoy a smaller tax burden if you start saving for your retirement. For example, small business owners should be regularly adding funds into their 401Ks with a pension plan, and let these funds accumulate to as much as $150,000 annually. 

Among the retirement plans to take advantage of are the following: 

• Simplified Employee Pension Plan (SEP)
• IRA
• Roth IRA
• 403(b) plans

In 2022, you might be able to contribute up to $61,000 to your 401(k), an increase from $58,000 in 2021. If you are at least 50 years old, the limit is increased to an additional $6,500 through a catch-up contribution.

2. Employ a Family Member

One of the best ways to reduce taxes for your business is to hire a family member. You could be eligible for a small business tax break if you hire your spouse, uncle, or children, for example. Enjoy more tax savings when you pay income to your children, too. 

Be aware that you will need to justify an appropriate source of income from your company to meet IRS guidelines.

3. Save Money for Medical Needs

You may reduce taxes for your small business if you begin saving money for a medical plan. Specifically, consider putting funds into a Health Savings Account (HSA) – if you have an eligible high-deductible health plan. An HSA will cover emergency healthcare needs, and it could potentially reduce your taxes considerably. 

Five advantages of an HSA are:

1. Contributions are pre-tax
   
2. Grows tax-free
3. Withdrawals for qualified medical costs are tax free
   
4. You can decide how to spend or save money in the HSA
5. You can invest some of your HSA balance in mutual funds, bonds, and stocks. 

4. Deduct Travel Expenses

If you are excited at the prospect of realizing a potentially major small business tax break, then begin deducting your travel expenses. You’ll be happy to know that business travel is completely deductible. Keep in mind this does not apply to personal travel. 

In order to optimize business travel for your small business, you can combine personal travel with a legitimate business purpose. You can leverage frequent flyer miles earned from business travel to redeem later for personal travel. 

5. Change Your Business Structure

Small business owners are responsible for paying the total amount of Medicare and Social Security taxes. However, if you change your business structure – to an LLC (Limited Liability Corp), for example – you must pay these taxes, but it may be possible to eliminate the employer half of those two tax responsibilities. 

Restructuring a sole proprietorship or partnership into an LLC or corporation does make good business sense if your small business has grown beyond the protections of your original structure. 

One key aspect to consider if you do make this switch in your business structure is being able to pay yourself an adequate salary. 

Ultimately, this could be an ideal way to reduce taxes for your small business.

6. Use Your Vehicle for Business Purposes

Think about all the driving you do for work. You are likely spending countless hours on the road for business purposes every week. Why not take advantage of having a small business tax break by deducting your car expenses?

There are two methods for determining the amount of your deductible car expense:

Standard Mileage Rate – The IRS allows you to deduct expenses associated with operating and maintaining your business vehicle per mile driven. In 2022, the standard mileage rate is
58.5 cents per mile from Jan. 1st through June 30th, and 62.5 cents per mile from July 1st through Dec. 31st. Two numbers you will need for this type of vehicle deduction are the total amount of miles driven during the year and total number of miles driven exclusively for business. 

Actual Expense – The IRS permits you to total all of your auto-related business costs and utilize this method for calculating the allowable deduction on your car as an alternative to the standard mileage rate. Deductible expenses do include costs such as gas and oil, maintenance and repairs, tires, registration fees and taxes – which are also deductible using the standard mileage deduction – rental or lease payments, licenses, insurance, etc. Keep track of when you used your car for business as opposed to personal use.

These six tips could very well significantly reduce your small business’s tax obligations. You would then be able to put that money back into your company and boost your profit margin. 

It is best to acquire the services of a tax professional to make sure your business could qualify for these potential tax savings. 

Look to PorterKinney for Expert Tax Preparation Services Designed to Save Your Small Business Money

Our tax experts at PorterKinney will provide you with clarity and simplicity when it comes to preparing your business taxes. We are committed to reducing your tax liabilities so you can reinvest that money back into your business!

PorterKinney has extensive experience in successfully delivering unmatched tax preparation solutions. We have prepared tax returns for more than 1,000 clients in the Tri-Cities, WA area. Each client of PorterKinney receives detailed attention of a CPA who carefully searches for additional tax deductions and discusses tax strategies for the future. 

If you are ready to hire PorterKinney for our tax preparation services, then we invite you to call us today. You can also email us.  We will then arrange a consultation for your small business as we set out to create a tax preparation plan that fits the unique needs of your company! 

Richland, WA – Main Office

(509) 703-7300

Kennewick, WA Office

(509) 586-4194