If you own a small business, there are many considerations when planning for taxes. In some cases, you have choices regarding the timing of income and expenses that can impact your taxes both for this year and next. One of the best things you can do is to plan for taxes for your business.
Getting a jump start on tax planning will save you time and money in the long run.
Who doesn’t like saving time and money?!?!
Plan for Taxes for Your Business
The time starts now so you can get the most out of your tax preparation. Don’t wait until the last moment (I’m talking to you if you’re a procrastinator), missing out on opportunities for using certain strategies, and stressing out about the process.
The whole idea behind staying on top of your business finances is to help alleviate stress, give you confidence in your business, and make tax time easier.
If those sound good to you, then now is the time to plan for taxes for your business.
Consider implementing some of these end-of-year tax strategies for your small business:
1. Mileage
Make sure all your mileage is recorded for the year. Mileage can be a nice additional business expense but you shouldn’t be taking this deduction unless you have a good mileage log.
What does a mileage log look like?
It needs to include the date, the miles driven, the purpose of the drive, and who you were meeting with if that’s relevant.
For example,
1/15/2022 7.6 miles, meet with John Smith at Starbucks, discussing work XYZ
1/31/2022 10.53 miles, Best Buy to buy a new computer
This can be a spreadsheet or a notebook or the best option (in my opinion) is an app. MileIQ is the recommended app and so far, the only one tested in tax court to withstand an audit! Use code: HRYA631A for 20% off!
For 2022, the standard mileage deduction is a little crazy because the IRS raised it mid-year. From January 1 to June 30, the rate is 58.5 cents. From July 1 to December 31 the rate is 62.5 cents.
Curious about how the standard mileage rate works?
Once you have your miles tallied up for the year, you simply multiply the number of miles driven times the standard mileage rate for that year. That’s your deduction.
If you’re tracking mileage, I do suggest writing down the vehicle’s odometer reading on December 31 or January 1. That’s your beginning mileage for the year. Once the year wraps up and you grab the next reading, it acts as the year-end mileage. Then you know you’re total miles driven for the year.
It’s important to know the total mileage so you can show personal vs. business miles.
If you are using tax software to file, you most likely only need to enter the number of miles driven and the software will do the calculation for you. Even better, right?!?!? No math is needed.
2. Buy any equipment needed
Now’s a great time to upgrade or buy new machinery or equipment needed to do your work. This doesn’t mean you should go crazy and buy all the stuff on your wish list. But, if your business needs a new camera or computer, now’s a good time to buy it and get the deduction. If the equipment purchase is over $2500, you’ll need to depreciate it.
However, depreciation through Section 179 comes in handy here as long as your business has a net profit. If your business is operating at a loss, then Section 179 depreciation won’t help you.
What is Section 179 depreciation, you ask?
It allows you to take 100% of the expense in the year the equipment is placed in service. Who doesn’t want to be able to take 100%??!?!
The equipment must be bought and put into service in the current tax year to count.
3. Prepay any expenses
You can prepay expenses for next year to create additional deductions for the current year. This means you can buy next year’s equipment now, or pay other upcoming expenses prior to the end of this year.
If you pay for it now, you can claim these expenses as deductions and save yourself additional money before tax season.
What are some expenses?
Software. Pay upfront for a year vs. monthly on software subscriptions like Canva, Microsoft, etc.
Utilities. Prepay for your internet or mobile devices.
Insurance. If you usually pay this monthly and have enough extra cash on hand, pay more in December.
4. Take advantage of retirement investing
United States tax laws offer taxpayers different ways to cut their taxes by putting income toward specific financial goals. When you use retirement investments wisely, they can add up to great tax savings for you and your family.
This is a commonly used year-end tax planning strategy because you’ll know your self-employment income and be able to max out contributions.
Retirement accounts like 401(k) plans and traditional IRAs allow you to defer the taxes on the annual contribution amount until you retire and decide to use that money. This will also allow you to reduce your taxable income by your contribution amount for the year, offering tax savings. Even self-employed digital nomads and RVers can take advantage of this option.
Roth IRAs allow you to save toward your retirement without having to pay any taxes on the income generated by those investments. However, this doesn’t help reduce income and therefore, income taxes in the current tax year.
5. Review your entity structure
You registered an LLC and now your business is doing really well. Congrats!
That’s awesome news. But it also means you might benefit from a different tax election.
Say hello to the S Corp. It’s not for everyone because there are extra complications including a separate tax return filing. However, if you’re up for the extras, then this could save you thousands in taxes.
Without going into too much detail here, the S Corp helps you save by not taxing 100% of your business net profit with Social Security and Medicare (aka self-employment taxes).
Chances are if you’re a single-member LLC or multi-member LLC (partnership), you are paying self-employment taxes on all your net profit. That’s totally normal and expected. Once your business hits certain net profits and you believe it will continue on that path, then the S Corp may be a good fit for you.
I encourage you to reach out to a tax professional to see if that’s the case. Each situation is unique and it might not be a good fit for you right now.
The Bottom Line
As a business owner, it’s important to consider your tax strategies all year long. You have many opportunities for tax savings and deductions throughout the year. However, keeping these strategies in mind as the year comes to an end will help you maximize your strategies for both this year and next.
