8 Expert Tax Tips for Small Businesses to Save Money and Avoid Penalties

Navigating the world of small business taxes can feel like a full-time job. Between managing day-to-day operations and keeping up with tax regulations, it’s easy to feel overwhelmed. But with the right strategies, you can save money and avoid common pitfalls.

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Understanding how to maximize deductions and credits can make a significant difference in your bottom line. From claiming the Qualified Business Income Deduction to writing off bad debts, these tips will help you optimize your tax situation.

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Here are eight expert tax tips designed to help small businesses save money and steer clear of penalties.

8 expert tax tips for small businesses to save money

Taxes can be daunting, but with the right moves, you can keep more of your hard-earned money.

1. Claim the Qualified Business Income Deduction

The Section 199A deduction, also known as the Qualified Business Income (QBI) deduction, allows eligible businesses to deduct up to 20% of their qualified business income. This deduction applies to sole proprietorships, partnerships, S corporations, and some trusts and estates.

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Eligibility for the QBI deduction depends on your taxable income. For 2024, if your taxable income is below $182,100 for single filers or $364,200 for joint filers, you can generally claim the full 20% deduction. If your income exceeds these thresholds, the deduction may be limited based on the type of business and the amount of W-2 wages paid.

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For more details on how to leverage this deduction, consult this guide to IRS Publication 535. The potential tax savings from the QBI deduction can be substantial, effectively reducing your taxable income and lowering your overall tax liability.

2. Take advantage of depreciation deductions

Depreciation deductions allow you to recover the cost of business assets over time. There are several types of depreciation deductions, including Section 179, bonus depreciation, and the Modified Accelerated Cost Recovery System (MACRS).

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Section 179 allows you to deduct the full purchase price of qualifying equipment and software up to a certain limit in the year it’s placed in service. For 2024, the deduction limit is $1,160,000.

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Bonus depreciation lets you deduct a large percentage of the cost of eligible assets in the first year. In 2024, you can deduct 80% of the cost of new and used assets.

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MACRS spreads the deduction over the useful life of the asset, allowing for larger deductions in the early years.

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Assets eligible for depreciation include machinery, vehicles, furniture, and buildings. By maximizing these deductions, you can significantly reduce your taxable income. For more insights on maximizing deductions, check out these small business tax deductions.

3. Deduct home office expenses

If you use part of your home exclusively and regularly for business, you may qualify for the home office deduction. This deduction can be calculated using either the simplified method or the regular method.

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The simplified method allows you to deduct $5 per square foot of your home used for business, up to a maximum of 300 square feet. The regular method involves calculating the actual expenses of your home office, such as mortgage interest, utilities, and repairs, and prorating them based on the percentage of your home used for business.

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Accurate recordkeeping is essential for claiming the home office deduction. Keep detailed records of your expenses and the portion of your home used for business to substantiate your deduction.

4. Contribute to retirement plans

Contributing to tax-advantaged retirement plans can provide significant tax benefits for small business owners. Popular options include Solo 401(k) plans and SEP IRAs.

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A Solo 401(k) allows you to contribute up to $66,000 in 2024, with an additional $7,500 catch-up contribution if you’re 50 or older. Contributions are tax-deductible, reducing your taxable income.

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A SEP IRA lets you contribute up to 25% of your net earnings from self-employment, with a maximum contribution of $66,000 in 2024. Employer contributions are also tax-deductible.

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These retirement plans not only help you save for the future but also provide immediate tax savings. For more tips on maximizing your tax benefits, consider taking advantage of tax credits.

5. Deduct vehicle expenses

If you use a vehicle for business purposes, you can deduct the associated expenses. You have two options: the standard mileage rate or the actual expense method.

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The standard mileage rate for 2024 is 65.5 cents per mile. This method simplifies recordkeeping, as you only need to track your business mileage.

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The actual expense method involves calculating the actual costs of operating the vehicle, including gas, maintenance, insurance, and depreciation. This method requires detailed recordkeeping but may result in a larger deduction.

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Whichever method you choose, keep accurate records of your business mileage and expenses to support your deduction.

6. Claim the self-employed health insurance deduction

If you’re self-employed and pay for your own health insurance, you may be eligible for the self-employed health insurance deduction. This deduction allows you to deduct the premiums you pay for medical, dental, and long-term care insurance for yourself, your spouse, and your dependents.

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To qualify, you must not be eligible for coverage through an employer or your spouse’s employer. The deduction is limited to your net profit from self-employment.

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Calculating the deduction involves adding up your eligible premiums and subtracting them from your taxable income, reducing your overall tax liability.

7. Write off bad debts

Bad debts occur when you can’t collect money owed to you by customers or clients. For tax purposes, you can write off these uncollectible debts as a deduction.

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To claim this deduction, you must demonstrate that the debt is uncollectible and that you’ve made reasonable efforts to collect it. This involves documenting your attempts to collect the debt and any correspondence with the debtor.

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Include the bad debt deduction on your tax return to reduce your taxable income and offset the loss.

8. Hire family members

Hiring family members can provide tax advantages for your business. Wages paid to family members are deductible as business expenses, reducing your taxable income.

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Ensure compliance with labor laws and tax regulations when employing family members. This includes paying a reasonable wage, withholding payroll taxes, and maintaining proper employment records.

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Documenting the employment arrangements and keeping accurate records will support your deductions and ensure compliance with tax laws.

How to avoid common small business tax penalties

Tax penalties can be a huge headache, but they're avoidable with some careful planning and diligence.

1. File and pay taxes on time

Meeting deadlines for filing returns and making payments is non-negotiable. Federal tax returns are typically due on April 15th, while quarterly estimated tax payments are due on April 15th, June 15th, September 15th, and January 15th of the following year. State and local tax deadlines may vary, so check with your local tax authority.

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Missing these deadlines can result in penalties and interest charges. The IRS imposes a late filing penalty of 5% of the unpaid taxes for each month or part of a month that a tax return is late, up to a maximum of 25%. The late payment penalty is 0.5% of the unpaid taxes for each month the tax is not paid, also up to 25%.

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If you can't file on time, request an extension using Form 4868 for individuals or Form 7004 for businesses. This grants you an additional six months to file, but it doesn't extend the time to pay any taxes due. If you can't pay your taxes in full, consider setting up a payment plan with the IRS using Form 9465.

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To ensure you stay on top of tax deadlines, consider setting reminders and using financial management tools.

2. Properly classify workers

Correctly classifying workers as employees or independent contractors is vital. Employees are on your payroll, and you must withhold income taxes, Social Security, and Medicare taxes. Independent contractors, on the other hand, handle their own tax obligations.

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Misclassifying workers can lead to significant penalties. If the IRS determines that a worker has been misclassified, you may owe back taxes, interest, and penalties. The IRS uses several factors to determine worker classification, including the degree of control you have over the worker and the financial relationship between you and the worker.

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Review the IRS guidelines, particularly the three categories of evidence: behavioral control, financial control, and the type of relationship. When in doubt, consult a tax professional to ensure proper classification.

3. Keep accurate records

Accurate recordkeeping is non-negotiable for tax purposes. Maintain records of all income, expenses, and deductions. This includes receipts, invoices, bank statements, and payroll records.

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Types of records to maintain include sales records, purchase records, payroll records, and supporting documents for deductions and credits. Retain these records for at least three years from the date you file your tax return, or two years from the date you pay the tax, whichever is later. However, if you underreport your income by more than 25%, keep records for six years. For records related to property, such as real estate or equipment, keep them until the period of limitations expires for the year in which you dispose of the property.

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To avoid potential issues, learn how to avoid accounting mistakes and ensure your records are accurate.

4. Avoid mixing personal and business expenses

Separate your personal and business finances to avoid complications. Use separate bank accounts and credit cards for business transactions. This simplifies recordkeeping and ensures that you can easily track business expenses.

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Document the business purpose of each expense. For example, if you take a client out for a meal, note the client’s name and the business purpose of the meeting. This documentation is necessary to substantiate your deductions in case of an audit.

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Commingling funds can lead to disallowed deductions and potential penalties. The IRS may scrutinize your records more closely if personal and business expenses are mixed, increasing the risk of errors and penalties. For more strategies to minimize audit risk, visit this guide.

What are the best tax planning strategies for small businesses?

Proactive tax planning helps you stay ahead of potential issues and optimize your financial situation. Start by timing your income and expenses strategically. Accelerate income or defer expenses to manage your taxable income effectively. This approach can help you stay within lower tax brackets and take advantage of available deductions.

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Maximize deductions and credits by staying informed about what you qualify for. Regularly review your business expenses and ensure you claim all eligible deductions. This includes common deductions like office supplies, travel expenses, and employee benefits. Also, explore available tax credits, such as those for research and development or energy-efficient improvements. For more insights, check out this guide on understanding assurance tax.

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Structuring your business for tax efficiency involves choosing the right business entity. Whether you operate as a sole proprietorship, partnership, LLC, or corporation, each structure has different tax implications. Consult with a tax professional to determine the most advantageous structure for your business. Learn more about LLC tax rates to make an informed decision.

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Working with a tax professional ensures you navigate complex tax laws and regulations correctly. A professional can provide personalized advice, help you identify tax-saving opportunities, and ensure compliance with tax requirements. Regular consultations can keep your tax strategy aligned with your business goals and changing tax laws. For more tips, explore strategies for tax optimization for sole proprietors.

Save time and money with Ramp

Optimize your small business tax strategy and streamline your financial operations with Ramp. Our comprehensive finance management platform, including corporate cards and advanced expense management tools, helps you save time and money. Visit Ramp Pricing to learn how we can support your business's financial health and efficiency. For a simple guide on how to file taxes as a small business, check out our resources.

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