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Effective Small Business Tax Strategies for 2024
Tax season can be stressful, especially for small business owners who may feel unsure about their tax planning options. With complicated regulations and numerous tax deadlines, figuring out how to handle taxes can be overwhelming. If you’ve ever wondered whether tax planning is right for your business or if it’s worth the effort, you’re not alone. The good news is that tax planning is not just for large corporations or financial experts. It’s a powerful strategy that can benefit businesses of all sizes. By implementing smart tax strategies, you can save money, reduce financial stress, and have a clearer picture of your business’s future. In this blog, we’ll break down some practical and effective tax planning strategies that you can start using today—without needing to be a tax professional.
1. Choosing the Right Business Structure for Optimal Tax Savings
The structure of your business plays a major role in determining your tax liability. Whether you’re operating as a sole proprietorship, LLC, S-Corporation, or C-Corporation, each structure has different implications for tax savings.
- Sole Proprietorship/Single-Member LLC: This is the simplest structure where your business income is reported on your personal tax return. One of the main advantages is deducting health insurance premiums, but it’s contingent on having reported net income. Additionally, you may qualify for the Qualified Business Income (QBI) deduction, which allows up to a 20% reduction in taxable income from qualified business activities.
- S-Corporation: By choosing this structure, you can split income between salary and dividends, which helps reduce self-employment taxes. However, your salary must be “reasonable,” and you still qualify for the QBI deduction. One caveat is that there are stricter regulations, particularly regarding payroll. For more details on S-Corporations, check out LLC Taxed as S-Corp Benefits to learn how LLCs can be structured for greater tax efficiency.
- C-Corporation: With a flat corporate tax rate of 21%, C-corps allow for significant deductions, including fringe benefits and health insurance premiums. Although double dividend taxation can be a drawback, C-corps offer more flexibility for shareholder-specific deductions and retirement contributions, providing greater options for long-term financial planning.
See Corporate Entity Structure Planning for in-depth guidance on selecting the best business structure for tax savings.
2. Leveraging the 12-Month Rule for Expense Planning
Instead of making large, unnecessary purchases at year-end, prepaying recurring business expenses like rent, subscriptions, or marketing costs is a smarter approach. The 12-month rule allows businesses to deduct prepaid expenses in the current tax year as long as the benefits don’t extend beyond the earlier of 12 months after the start of the right or benefit or the end of the next tax year.
For example, if your business signs a lease agreement and prepays rent for the following year, you may be able to deduct that payment in the current year. It’s important to note that this rule does not apply to inventory purchases or interest payments.
3. Business Tax Credits You Can Claim in 2024
Business tax credits are underutilized but can provide substantial savings. Unlike deductions, which lower taxable income, tax credits reduce your tax liability dollar for dollar. Here’s a closer look at some key credits:
- Work Opportunity Tax Credit (WOTC): You can qualify for a tax credit if you hire individuals from specific target groups—like veterans, ex-felons, or long-term unemployment recipients. The credit can be as high as 40% of the first $6,000 in wages paid to qualified employees, and it’s available for hires through 2026. Businesses must ensure they file IRS Form 5884 and other required documentation to claim this credit.
- Energy Efficiency Credit: Companies investing in renewable energy, such as solar or wind installations, may qualify for up to 30% tax credits on installation costs. Bonus credits are also available for domestic content (10%), energy communities (10%), and low-income community installations (10-20%). This is a compelling incentive for businesses looking to reduce their carbon footprint while cutting tax costs.
- Disabled Access Credit: Small businesses that make their facilities accessible to individuals with disabilities may qualify for a 50% tax credit, up to $5,000 annually. Qualifying expenses include modifying physical structures, providing interpreters, or improving website accessibility to meet ADA compliance standards.
Case Study: Maximizing the Work Opportunity Tax Credit
A small retail business in an underserved community was looking for ways to reduce its tax liability. After consulting a tax advisor, the company implemented a strategy of hiring individuals from targeted groups that qualified for the Work Opportunity Tax Credit (WOTC). Over the course of the year, the business hired five qualified employees, each earning a salary of $30,000.
By taking advantage of the WOTC, the company was able to reduce its tax liability by $12,000 (40% of $6,000 per qualified employee). This strategy not only helped the business save on taxes but also gave them the opportunity to make a positive community impact by hiring individuals who needed jobs.
4. Maximize Your Savings with an Accountable Plan
An accountable plan is a structured way to reimburse employees for work-related expenses. When employees incur business expenses for travel, meals, or supplies, reimbursing them under an accountable plan makes these payments tax-free for both the employee and the business. For a plan to qualify, the IRS requires that all expenses be substantiated, meaning employees must provide receipts and other supporting documentation.
By implementing this plan, businesses can avoid paying payroll taxes on the reimbursed amounts, which leads to significant savings.
Accurate bookkeeping is crucial for accountable plans. Explore our Bookkeeping Services to streamline your expense management.
5. Utilize the $2,500 De Minimis Safe Harbor Election
The De Minimis Safe Harbor Election allows businesses to immediately deduct purchases of tangible property under $2,500 without having to capitalize and depreciate these assets. This deduction applies per item or invoice and simplifies the accounting process for smaller expenses, such as office equipment or minor repairs.
For example, if your business buys new computers for $2,000 each, you can deduct the full expense in the year of purchase rather than spreading the cost over several years. This not only saves on taxes but also reduces administrative paperwork.
6. Take Advantage of Qualified Improvement Property Deductions
Qualified Improvement Property (QIP) refers to improvements made to the interior of non-residential buildings. Under Section 179, businesses can fully expense these improvements, including heating and cooling systems, fire alarms, and security systems, in the year they are placed in service. This provision allows for immediate expensing rather than depreciation over 39 years.
Since the enactment of the Tax Cuts and Jobs Act (TCJA), businesses can now deduct 100% of the cost of these improvements in the same year, making it a powerful tool for reducing taxable income.
7. Self-Rentals: Renting Property to Your Business
Self-rentals, where business owners rent property they own to their own business, can be a tax-efficient strategy. This structure allows the business to deduct rental payments as a business expense, while the owner reports the rental income separately. However, it’s important to structure self-rentals properly to avoid IRS scrutiny.
One key consideration is forming a multi-member LLC to hold the rental property, ideally with a spouse or other trusted partner. This structure helps shift income while mitigating the impact of self-employment taxes on the rental income.
8. Switch to Cash Accounting for Tax Deferral
Businesses with average gross receipts below $29 million (based on the 2023 threshold) may qualify to switch from accrual accounting to cash accounting. Under cash accounting, revenue is recognized when payment is received, not when earned. This allows for income deferral, potentially pushing income into future tax years and improving cash flow in the present.
Filing IRS Form 3115 is required to make this change, but the benefits often outweigh the administrative effort.
9. Section 754 Election: Key Tax Benefits for Partnerships
Partnerships that undergo ownership changes—either through the sale of a partner’s interest or due to a partner’s death—can take advantage of the Section 754 election. This election allows for a step-up in the tax basis of the partnership’s assets, enabling new partners to receive a higher basis in the assets, thereby reducing the taxable gain when the assets are sold.
This can also allow the new partner to claim larger depreciation deductions, resulting in long-term tax savings. However, it’s essential to note that once the Section 754 election is made, it cannot be revoked without IRS consent.
10. Cost Segregation Studies: Accelerate Depreciation for Bigger Savings
A cost segregation study allows businesses to accelerate depreciation on certain parts of a building, such as fixtures, equipment, or specific improvements. By reclassifying these components into shorter depreciation categories, businesses can claim larger deductions upfront rather than over the building’s 39-year life.
For instance, lighting fixtures or specialized electrical work could be reclassified from a 39-year category to a 5- or 7-year category, leading to immediate tax savings. Though cost segregation studies typically involve some cost, they can offer significant benefits for properties with a high tax basis, making them ideal for commercial property owners.
To ensure you’re audit-ready, consider professional support like IRS Audit Representation.
Conclusion
Tax planning doesn’t have to be overwhelming. Even small steps toward implementing these tax strategies can significantly reduce your tax burden and improve your financial outlook. Whether you’re a new entrepreneur or a seasoned business owner, taking control of your taxes will help you save money, reduce stress, and position your business for future growth. Remember, you don’t have to figure it all out on your own—working with a CPA or tax advisor can make the process much smoother. Start by implementing a few of these strategies today, and your business will reap the rewards come tax season.
Key Takeaways
- Choose the right business entity to optimize tax benefits.
- Use the 12-month rule to prepay expenses and increase deductions.
- Leverage business tax credits like the Work Opportunity Tax Credit and energy efficiency credits for significant tax savings.
- Implement an accountable plan to reimburse employees for business expenses tax-free.
- Use the De Minimis Safe Harbor Election to immediately deduct smaller property purchases.
- Take advantage of qualified improvement property deductions under Section 179.
- Properly structure self-rentals to reduce tax liabilities on rental income.
- Switch to cash accounting to defer income and improve cash flow.
- Consider the Section 754 election for partnerships to step up asset basis.
- Perform cost segregation studies to accelerate depreciation and increase tax deductions.
Frequently Asked Questions (FAQs)
1. What tax credits can businesses claim in 2024?
Businesses can claim credits like the Work Opportunity Tax Credit (WOTC) for hiring qualified employees, energy efficiency credits for renewable installations, and the Disabled Access Credit for making workplaces more accessible. Learn about available government support from What is the SBA and How Can They Help Me?
2. How do self-rentals benefit business owners?
Self-rentals allow business owners to deduct rental payments as business expenses while reporting rental income separately. Structuring it correctly can reduce tax liabilities.
3. What is a cost segregation study?
A cost segregation study accelerates depreciation on certain building components, offering larger tax deductions upfront rather than over the long term.
4. Is cash accounting better for small businesses?
Cash accounting allows small businesses to recognize income when payments are received, potentially deferring income taxes and improving cash flow.
5. How does the 12-month rule work for prepaid expenses?
Under the 12-month rule, prepaid expenses (like rent or marketing) can be deducted in the current year if the benefit lasts less than 12 months or doesn’t extend beyond the next tax year.
6. How can partnerships use Section 754 election?
The Section 754 election allows partnerships to step up the tax basis of their assets during ownership changes, reducing taxable gains and increasing depreciation deductions.
Ready to Maximize Your Tax Savings?
Don’t leave money on the table! Whether you’re looking to optimize your business structure, leverage tax credits, or implement advanced tax strategies, our team of experienced CPAs is here to help. Visit our Tax Planning Services page to learn how we can tailor solutions to meet your specific needs. Get in touch today and start reducing your tax burden while boosting your business growth!