The year 2022 has been a financially difficult one for both investors and consumers. The cost of, um, everything has increased. Numerous stocks and cryptocurrencies have decreased in value. As interest rates continue to rise, the real estate market, which boosted some investors' portfolios, has started to cool.
It's critical for small business owners to stay current on tax planning techniques in order to reduce their tax obligations. Planning your taxes is one approach to achieve this. Choosing tax strategies to reduce your tax liability is the process of tax planning. It's a good idea to review some of the crucial tax decisions you need to make before 2023 as the new year is quickly approaching.
1. Increase your retirement funds.
You can save on taxes while planning for your golden years, which will benefit both you and your future self. A SIMPLE IRA (Savings Incentive Match PLan for Employees), SEP IRAs (Simplified Employee Pensions), and Solo 401(k)s are a few retirement savings options that are available to small businesses. In addition to allowing you to deduct contributions from your taxable income and postpone paying taxes on investment gains until withdrawal, these plans offer significant tax benefits.
2. Examine your organizational design.
Do you still employ the original organizational structure of your business? If so, it might be time to reassess whether it still represents the best course of action for your company. For instance, you might want to think about switching to a C corporation if your company has experienced significant growth since you first started it.
The top corporate tax rate was 35% prior to the passage of the Tax Cuts and Jobs Act of 2017 (TCJA). However, the TCJA reduced it to 21%. This is considerably less than the highest individual tax rate of 37%. A change in tax status may result in significant tax savings for LLC members who are in the highest tax rate. Is it crucial to consult a tax expert to help you weigh the benefits and drawbacks.
3. Increase your tax deductions.
Make sure you're claiming all the tax breaks that are available to you. Reviewing your costs and deductions should be one of your first steps in tax planning. This will assist you in figuring out what costs are deductible and how much you can write off. Always keep in mind that you can only deduct the percentage of an item that is connected to your business.
If you use your car for both business and pleasure, for instance, you can only write off the cost of the business use component of the bill. You can write off a portion of your rent or mortgage interest if you have a home office. You can keep track of your deductible expenses with accounting software.
4. Acceleration or deferral of income
Taxes are paid on income in the year it is received. You might be able to decide whether to pay more in taxes this year or the following year, depending on your circumstances. If you can pay later, why pay now? Defer any income you may until the following year in order to reduce your tax liability this year. If you run your business on a cash basis, for instance, you can start sending bills in January 2023. Your income won't be subject to taxes until 2024.
However, if you want to reduce your taxes for the following year, take as much money as you can in 2022. Make sure you submit all of your billing before the year is out. In 2023, when your income tax might be greater, this could reduce the income you claim. If you anticipate being in the same or a lower tax bracket the next year, deferring income makes financial sense. If deferring income could put you in a higher tax rate, you shouldn't do it. If so, you could choose to accelerate your income this year so you can pay taxes now while in a lower bracket rather than later when you'll be in a higher bracket.
Planning your taxes is a crucial part of managing a small business. You can reduce your tax obligation and keep more of your hard-earned money by utilizing these tactics.
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