by Stephen Reed | Accounting News, News, Tax, Tax Planning
As the owner of a small business, you are well aware that taxes are one of the most important topics on which to keep up to date. Making mistakes could mean a higher tax bill, and failing to properly manage your taxes could land your business in trouble. On the other hand, planning in advance, taking advantage of available deductions, and preparing your tax returns correctly can save on the amount of taxes your business is required to pay. Keep reading for tax-saving strategies to help reduce your tax bill.
Use the Qualified Business Income Deduction
The Qualified Business Income (QBI) deduction was created when the Tax Cuts and Jobs Act (TCJA) was established in 2018. With the QBI you might be eligible to deduct up to 20% from your qualifying business income if your business is a pass-through entity—a sole proprietorship, an S corporation, a partnership, or a limited liability company (LLC), where business income is passed to its shareholders, partners, or owners to report on their personal tax returns.
Limits apply to the QBI deduction based on income level and business type, so be sure to talk to your tax advisor. It’s also worth noting that the QBI deduction is set to expire in 2025.
Fund a Retirement Plan
Providing a qualified retirement plan for yourself and/or your employees can help save money on taxes. Owners of corporations can contribute up to 25% of their salary to a tax-deferred plan like a 401(k) or 403(b). Sole proprietors can contribute up to 20% of income into a tax-deferred SEP-IRA account.
Take Advantage of Tax Credits
Tax credits can be subtracted from owed business income taxes at state or federal levels. They encourage investment or provide assistance in targeted areas such as employee hiring, training, and retention; clean energy initiatives; disaster relief; and new construction, historic preservation, and disability access. The list of potential tax credits for businesses is extensive, so be sure to check with your accountant about your available options.
Take Tax Write-Offs for Qualifying Purchases
If you purchase equipment, machinery, and vehicles (and sometimes real estate) for your business, you can take tax-write-offs. The most frequently utilized types of deprecation are Section 179 deductions and bonus appreciation.
Section 179 deductions permit business owners to deduct the costs of certain assets as soon as they’re put to use, so you can deduct the entire cost of equipment in the year it is placed in service. This could allow you to pay lower taxes in the current year and still buy or lease more equipment to write off in following years.
Bonus depreciation is an added advantage for purchasing assets. The TCJA increased this tax break from 50% to 100% of the cost for assets placed in service through January 1, 2023.
Defer Income and Accelerate Expenses
Defer income by shifting some of it from this year into the next. You can do this by holding on to year-end invoices until just before the start of the new year. You likely won’t collect the payment until the first quarter of the new year, so taxes on that income won’t be paid until next year. Accelerate expenses in the fourth quarter by prepaying some expenses that aren’t due until the following year. Of course, you’ll need to determine the year in which you expect to pay the most in taxes. For instance, if you anticipate notably higher personal income next year, it may save on taxes to collect income now rather than delay it until next year.
Deduct Travel Expenses
Business travel is entirely deductible. While personal travel doesn’t hold the same advantage, you might be able to combine an acceptable business purpose with personal travel in order to maximize business travel. Keep in mind, too, that frequent flier miles earned from business travel can be applied to personal travel at a later time.
by Pete McAllister | Accounting News, News, Tax, Tax Planning, Uncategorized
There are some valuable tax deductions available for self-employed people. The key is knowing what they are and how they can help reduce your tax bill. Here are some key self-employment tax deductions to remember.
Home Office Deductions
This deduction allows you to deduct any portion of your home that is used specifically and regularly for work. There are two methods used for deducting home office expenses:
- Regular Method: To use this method, you will itemize the actual expenses incurred by completing form 8829. The list of deductible expenses includes furniture, appliances, utilities, insurance, maintenance, and repairs. If you plan to use this method, it’s important to keep accurate and detailed receipts.
- Simplified Method: To use this method, you will simply apply the standard deduction of $5 per square foot of home used for business, up to a maximum of 300 square feet. This is an easier way to account for home office expenses than the method above, but keep in mind that the 300 square-foot limit amounts to a maximum deduction of $1,500.
Vehicle Use for Business
You may be able to deduct the use of your vehicle on your tax return if you regularly use it as part of your business. There are two methods of calculating these expenses:
- Actual Expense Method: Employing this method authorizes you to deduct specific costs essential to operating your business vehicle, such as gas, oil changes, tires, registration fees, insurance, and depreciation. If you also use your business vehicle for personal use, you will need to calculate the portion of the operating costs that you generated due to business travel, and only that amount is deductible.
- Standard Mileage Rate: To use this approach, you will multiply the number of business miles driven by a flat per-mile rate. This rate can vary from year to year. For tax year 2021, it decreased from 57.5 cents to 56 cents per mile.
Health Insurance
If you are self-employed, you can deduct the cost of health care premiums for you and your family. This includes any children under 27 who are on your health plan, regardless of whether you claim them on your return. However, you won’t qualify for this deduction if you or your spouse are eligible for an employer-sponsored health plan.
Social Security Taxes
Employees who work for a company have payroll taxes deducted from their paychecks, and Social Security and Medicare are typically split equally between employee and employer (i.e., employee pays 7.65% and employer pays 7.65%). However, the self-employed pay the total 15.3% tax, which consists of a 12.4% Social Security tax and a 2.9% Medicare tax. The 15.3% tax is owed if your net earnings for the year are greater than $400. The good news for the self-employed is that they can write off half of the self-employment tax without the need to itemize. For tax year 2021, the maximum amount of self-employment income that’s subject to the 12.4% Social Security tax is $142,800. In 2022, it increases to $147,000.
Retirement Tax Shelters and Credits
If you are self-employed, you are eligible to contribute pretax money to a simplified employee pension (SEP) or a solo 401(k). This is in addition to an IRA account. Both SEPs and solo 401(k)s allow higher annual limits than regular individual retirement accounts.
Covid-Related Sick and Family Leave Credits
These tax credits are applicable for the first nine months of 2021. As a self-employed person, if you were unable to work (including telework or working remotely) due to certain COVID-19 related circumstances you are eligible to claim sick and family leave credits that are comparable to credits authorized for other businesses. These circumstances include personal sickness or quarantine, awaiting the results of a COVID test, and caring for a dependent who was sick or unable to attend school or daycare because of sickness, closure, or quarantine.
The credit amounts you are ultimately eligible for will depend on a few different factors, including the reason for missed work, timeframe of missed work, and duration of missed work. You will need to fill out the IRS’s Form 7202 to calculate your credits.
Deduction for Qualified Business Income
The qualified business income deduction (QBI) allows eligible self-employed and small-business owners (including sole proprietors) to deduct up to 20% of their qualified business income on their taxes.
In order to qualify, in general, total taxable income in 2021 must be under $164,900 for single filers and $329,800 for joint filers. These limits raise in 2022 to $170,050 for single filers and $340,100 for joint filers. If your taxable income is above these limits, complex IRS rules will verify whether your business income qualifies for a full or partial deduction.
Expensing
Expensing (also known as Section 179 deduction) lets you deduct the full purchase price of certain qualifying business assets in the year you bought them. The tax break applies to physical items—equipment (new and used), machinery, office furniture, off-the-shelf software, etc. Intangible assets such as patents and copyrights do not qualify, but improvements to business buildings as well as any installation of fire alarms and security systems do qualify for the tax break. You also cannot use this deduction for purchased land and real estate.
For tax year 2021, up to $1.05 million worth of equipment is acceptable for the immediate write-off of expenses, but this amount decreases if you put more than $2.62 million of new assets into service over the course of any single year. The equipment must have been purchased (or financed) and placed into service by December 31, 2021.
