Tax Strategies for Small Businesses in 2024

Tax Strategies for Small Businesses in 2024

Small businesses face many challenges and opportunities in 2024. The tax law changes, the inflation adjustments, and the COVID relief measures may affect their tax situation and planning. Therefore, it is important for small business owners to be aware of the tax strategies that can help them reduce their tax liability and increase their cash flow. Here are some of the tax strategies for small businesses in 2024:

1. Maximize your deductions

One of the most effective tax strategies for small businesses is to maximize their deductions, which are expenses that can be subtracted from their income to lower their taxable income. Some of the common deductions for small businesses include:

• Business expenses, such as rent, utilities, supplies, advertising, travel, meals, and entertainment. However, these expenses must be ordinary and necessary for the business and must be properly documented and substantiated.
• Depreciation, which is the gradual deduction of the cost of certain assets, such as equipment, vehicles, furniture, and software. However, these assets must be used for the business and must have a useful life of more than one year.
• Section 179 deduction, which is a special deduction that allows small businesses to deduct the full cost of certain assets in the year they are purchased, instead of depreciating them over time. However, there are some limits and rules that apply to this deduction, such as the $1.05 million deduction limit and the $2.62 million investment limit for 2024.
• Bonus depreciation, which is another special deduction that allows small businesses to deduct 100% of the cost of certain assets in the year they are purchased, even if they exceed the Section 179 limit. However, these assets must be new or used, and must have a recovery period of 20 years or less.

2. Claim your credits

Another tax strategy for small businesses is to claim their credits, which are amounts that can be subtracted from their tax liability to lower their taxes. Some of the common credits for small businesses include:

• Research and development credit, which is a credit that rewards small businesses for engaging in qualified research and development activities, such as developing new products, processes, or software. However, these activities must meet certain criteria, such as being technological, experimental, and useful for the business.
• Work opportunity credit, which is a credit that encourages small businesses to hire certain workers who face barriers to employment, such as veterans, ex-felons, or disabled individuals. However, these workers must meet certain eligibility requirements, such as being certified by the state workforce agency, and must be hired before December 31, 2024.
• Employer credit for paid family and medical leave, which is a credit that supports small businesses that provide paid family and medical leave to their employees, such as for the birth or adoption of a child, or for a serious health condition. However, the leave must be at least 50% of the normal wages and must be for at least two weeks for full-time employees and a proportional amount for part-time employees.

3. Reduce your income

Another tax strategy for small businesses is to reduce their income, which is the amount that is subject to tax. By reducing their income, small businesses can lower their tax bracket and pay less tax. Some of the ways to reduce income for small businesses include:

• Deferring income, which is postponing the receipt of income to a later tax year, such as by delaying the billing or collection of payments, or by using the cash method of accounting instead of the accrual method. However, this strategy may not be beneficial if the income is expected to increase in the future, or if the cash flow is needed for the business.
• Accelerating expenses, which is paying or incurring expenses in the current tax year, instead of the next tax year, such as by prepaying rent, insurance, or interest, or by purchasing supplies or equipment. However, this strategy may not be feasible if the cash flow is tight, or if the expenses are not deductible in the current year.

• Contributing to retirement plans, which is saving money for retirement and reducing the current income, such as by contributing to a 401(k), a SEP IRA, a SIMPLE IRA, or a solo 401(k). However, these contributions must be made by the deadline, which is usually December 31 for 401(k)s and April 15 for IRAs, and must follow the contribution limits.

4. Take advantage of tax breaks

Another tax strategy for small businesses is to take advantage of tax breaks, which are special provisions that reduce or eliminate the tax liability for certain situations or activities. Some of the tax breaks for small businesses include:

• Qualified business income deduction, which is a deduction that allows small businesses to deduct up to 20% of their qualified business income, which is the income from a pass-through entity, such as a sole proprietorship, a partnership, an S corporation, or a limited liability company. However, this deduction is subject to some limitations and phase-outs.
• Capital gains exclusion, which is an exclusion that allows small businesses to exclude up to 100% of the capital gains from the sale of certain qualified small business stock, which is the stock of a domestic corporation that meets certain requirements, such as being engaged in a qualified trade or business, having gross assets of $50 million or less, and being held for at least five years.
  However, this exclusion is subject to some limitations and rules, such as the $10 million or 10 times the basis cap, and the alternative minimum tax adjustment.
• Net operating loss carryback, which is a provision that allows small businesses to carry back their net operating losses, which are the excess of deductions over income, to the previous five tax years, and claim a refund of the taxes paid in those years. However, this provision is only available for losses incurred in 2020 and 2021, and must be claimed by filing an amended return or a tentative refund claim.

5. Plan ahead and seek professional help

The final tax strategy for small businesses is to plan ahead and seek professional help, which can help them avoid mistakes, save time and money, and optimize their tax situation. Some of the ways to plan ahead and seek professional help for small businesses include:

• Keeping good records, which is maintaining and organizing the tax records, such as receipts, invoices, bank statements, and tax forms, throughout the year, and storing them in a safe and accessible place. This can help small businesses to track their income and expenses, substantiate their deductions and credits, and prepare their tax return.
• Reviewing the tax law changes, which is staying updated and informed of the tax law changes that may affect the small business, such as the tax rates, the brackets, the deductions, the credits, and the COVID relief measures. This can help small businesses to adjust their tax planning and strategies accordingly, and to take advantage of the tax opportunities and benefits.
• Seeking professional help, which is hiring a qualified and experienced tax professional, such as an enrolled agent, a certified public accountant, or a tax attorney, to assist with the tax planning and preparation, and to represent the small business in front of the IRS if needed. This can help small businesses to comply with the tax laws and regulations, to minimize their tax liability and maximize their refund, and to resolve any tax issues or questions.

In conclusion, business taxes tend to be complicated, hence the need to always seek professional help with every aspect of taxes, bookkeeping, and accounting. You can contact my office at (202) 618-1295 or click this link for excellent service in each area. I am an accountant and IRS Enrolled Agent with more than 10 years of experience.

Frequently Asked Questions

1. What are the 3 basic tax planning strategies?

The 3 basic tax planning strategies are: reducing your overall income, increasing your number of deductions, and claiming your credits. These strategies can help you lower your taxable income and your tax liability.

2. What are taxation strategies?

Taxation strategies are the methods and techniques you use to minimize your taxes and maximize your benefits. They involve understanding the tax laws, rules, and regulations, and applying them to your specific situation and goals.

3. What is an example of a tax-saving strategy?

An example of a tax saving strategy is contributing to a retirement plan, such as a 401(k) or an IRA. This can reduce your taxable income by the amount you contribute, and also allow your money to grow tax-deferred or tax-free until retirement.

4. How do high-income earners reduce taxes?

High-income earners can reduce their taxes by using various strategies, such as deferring income, accelerating expenses, contributing to tax-advantaged accounts, taking advantage of tax breaks, planning ahead, and seeking professional help.

5. What are the 5 pillars of tax planning?

The 5 pillars of tax planning are: deducting, deferring, dividing, disguising, and dodging. These are the categories of tax planning strategies that can help you reduce your taxes in different ways.

6. How can I get less tax refund?

You can get less tax refund by adjusting your tax withholdings on your W-4 form. This will reduce the amount of taxes that are taken out of your paycheck, and increase your take-home pay. However, this also means that you will owe more taxes or get a smaller refund when you file your tax return. You should use a tax calculator or consult a tax professional to determine the optimal amount of withholdings for your situation.