Want to lower your next income tax bill? Here are some mid-year tax planning strategies for small businesses:
Establish a retirement plan for employees
If your business doesn’t already offer a retirement plan, now’s the time as current rules allow for significant deductible contributions. If you’re self-employed and set up a SEP plan for yourself, you can contribute up to 20% of your net self-employment income with a maximum contribution of $66,000 for 2023. If you’re employed by your own corporation, you may contribute up to 25% of your salary with a maximum contribution of $66,000 for 2023.
Leverage depreciation tax breaks
Current federal income tax rules allow first-year depreciation write-offs for eligible assets placed in service during your business’s current tax year:
- Depreciation deductions for passenger cars, as well as heavy or light SUVs, pickups and vans used over 50% for business
- Section 179 deductions for qualifying personal property used for business
- First-year bonus depreciation for qualified new and used property
Time your business income and deductions for maximum savings
Deferring income into next year while accelerating deductible expenditures into this year makes sense if you expect to be in the same or a lower tax bracket next year, because it effectively postpones part of your tax bill from 2023 until 2024. And after the inflation adjustments to 2024 rate bracket thresholds, the deferred income might be taxed at a lower rate. On the other hand, if you expect to be in a higher tax bracket in 2024, take the opposite approach.
Maximize the qualified business income (QBI) deduction
The deduction based on QBI from pass-through entities was a key element of 2017 tax reform. For tax years through 2025, the deduction can be up to 20% of a pass-through entity owner’s QBI, subject to restrictions that may apply at higher income levels. For QBI deduction purposes, pass-through entities are defined as sole proprietorships, single-member LLCs that are treated as sole proprietorships for tax purposes, partnerships, LLCs that are treated as partnerships for tax purposes and S corporations.
Claim the gain exclusion for qualified small business stock
Don’t overlook the 100% federal income tax gain exclusion privilege for eligible sales of Qualified Small Business Corporation (QSBC) stock that was acquired after September 27, 2010. QSBC shares must be held for more than five years to be eligible for the gain exclusion break.
Employ family members
Hiring family members can be a useful strategy to reduce overall tax liability. If the family member is a bona fide employee, the taxpayer can deduct the wages and benefits, including medical benefits, paid to the employee on Schedule C or F as a business expense, thus reducing the proprietor’s self-employment tax liability. In addition, wages paid to your child under the age of 18 are not subject to federal employment taxes, will be deductible at your marginal tax rate, are taxable at the child’s marginal tax rate, and can be offset by up to $13,850 (your child’s maximum standard deduction for 2023).
Questions? Reach out to Magone & Company
Our goal is to get you thinking about potential moves that can minimize your small business’s tax liability before the end of the year. If you have questions or would like our expertise in evaluating your business’s best tax planning options, give us a call at (973) 301-2300.
This document is for informational purposes only and should not be considered financial advice. Be sure to consult with a knowledgeable tax adviser regarding your taxes.