You probably already know you should contribute to a retirement plan, claim premiums you paid for health insurance, make gifts to your family, employ and pay your children, etc. You also may know you can make changes in your estate and claim gift tax exemptions that will end after 2025, prompting you to be creative in finding ways to transfer more of your business out of your personal estate. These and many other well-known strategies for minimizing a small business owner’s tax liability can save you significantly at tax time. Here are some perhaps less-familiar tax saving tips to use in evaluating your business’s financial position and applying appropriate strategies to maximize tax savings in 2024 and 2025.
11 Tax Tips for Small Business Owners in 2024
Whatever your small business circumstances, your tax strategies and year-end tax preparation choices can significantly impact your total tax obligation. Work with a qualified tax advisor in considering these 11 strategies to cut your tax bills for 2024 and 2025 and beyond:
1. Find out whether your business qualifies for different tax treatment.
You may be entitled to deduct 20% of qualified business income from your federal taxes. But, it necessitates planning. Along with other provisions of the Tax Cuts and Jobs Act (2017), this deduction will end after 2025. It typically applies to “pass-throughs” for owners filing tax returns and paying taxes themselves on their business’s income, vs. having the business filing the tax return and paying the tax. Work with your tax advisor to understand which deductions you’re legally entitled to claim for your business.
2. Use bonus depreciation or IRS Section 179 to deduct for fixed assets.
IRS Section 179, including bonus depreciation, is a federal tax law that allows small and medium-sized businesses to deduct the full cost of purchasing a fixed asset vs. depreciating it over multiple years. Before 2023, you could deduct 100% of qualifying purchase amounts as bonus depreciation. But in 2023, bonus depreciation became limited to 80%; for 2024, the bonus depreciation was lowered to 60%. Section 179 enables businesses to maximize fixed asset deductions on business machinery, trucks over 6,000 pounds, and office equipment by claiming the Section 179 maximum ($1,220,000 for 2024). Businesses can also claim the bonus depreciation on the remaining amount of the equipment purchase cost (60% for 2024). The maximum spending cap on equipment purchases in 2024 is $3,050,000. The key is to complete your business’s purchases and put equipment and machines in service by December 31, 2024.
3. Develop a sound plan for paying taxes on your business income.
Prepare as early as possible in the tax year, and even before it, to avoid disruptions to cash flow. You may prefer to save money throughout the year to pay your tax bill or arrange for a line of credit to pay it when you file your business income tax return. With inflation and the resulting higher operating costs, being ready for the upcoming April tax payment can prevent potential risk to liquidity. Paying periodic estimated tax payments (based on the previous year) can help in maintaining a steady cash flow during the months after tax filing. Pay at least 90% of your tax for the current year before the upcoming April tax deadline, or pay 100% of the tax on your previous year’s return to prevent the risk of underpayment penalties.
4. Claim all allowable equipment deductions – at the right time.
If you buy equipment this year, especially at the enormous cost of a new or used sweeper truck, and start using it before December 31, 2024, you could qualify to expense that purchase and claim it as a whopping federal tax deduction, per IRC Sec 179.3. The cumulative cost of assets expensed in full is currently limited to $1,220,000 per tax year for some business entities, but for a small business, you may be able to expense equipment investments up to about $3 million. If it is more advantageous for tax purposes, you may consider delaying such purchases to more strategically practical future tax periods.
5. Defer recognition of revenue and increase expenses.
Under the Tax Cuts and Jobs Act of 2017, which ends after 2025, the top marginal income tax rate for individual taxpayers will increase from 37% to 39.6%. Therefore, if you’re anticipating high profits in 2024, it may make more sense to defer recognition of some revenues to 2025 and increase your expenses by paying some 2025 costs during 2024. Using this strategy is subject to legal restrictions, but you can potentially generate a significant tax savings in some cases, due to a lower marginal tax rate. Alternatively, if you expect a net loss in 2024, you may opt to talk with your tax advisor about carrying the loss to future years, to offset predictably higher income tax in those years.
6. Claim all allowable green energy tax credits.
Commercial pavement sweeping businesses may qualify for green energy tax credits due to the contribution such operators make every year using their equipment to help maintain cleaner groundwater and waterways and the general environment. Even if you don’t perceive your company as one necessarily dedicated to green processes and equipment, look more closely at the credits you may actually be entitled to claim. Also, consider making some green upgrades to increase your eligibility for more tax credits. The Inflation Reduction Act (2022) allocates almost $400 billion to clean energy tax credits and other climate change mitigation incentives. Buying electric or hybrid vehicles, installing clean energy equipment, and other investments may qualify you for unexpected federal and/or state tax savings.
7. Claim your Qualified Business Income Deduction (Form 199A).
Through 2025, you can reduce your business’s taxable income by claiming the QBI deduction up to the equivalent of 20% through your personal tax return as a sole proprietor, owner in a partnership, or shareholder in an S-corp. Limitations on the income deduction do not apply to joint filers with a combined taxable income under set thresholds. For example, in 2022, the threshold was $340,100 for joint filers and $170,050 for single filers. Even if your 2024 taxable income is above the current applicable threshold, you’ll probably be eligible for some amount of deduction. The calculation is more complex in those cases, but your CPA will know what to do.
8. Employ people who qualify you for Work Opportunity Tax Credit.
You are entitled to the Work Opportunity Credit (WOTC) as a business owner who employs workers who have a state certification classifying them as members of one of the groups listed below. You can claim 40% of the worker’s first year of pay if he/she worked 400 hours or more, or 25% of pay to those who worked at least 120 hours under 400 hours. File IRS Form 8850 before making an employment offer to:
- Vocational rehab participants
- Veterans
- Family assistance recipients
- Title IV-A recipients
- Convicted felons
- SNAP benefits recipients
- Summer youth program workers
- SSI benefits recipients
9. Use pass-through entity status if it can help reduce your taxes.
If your business structure is an LLC or S corp, find out if your state has enacted PTE taxes. Many have done so, and this policy provides business owners with an IRS-approved way to effectively bypass the $10k limit on state and local deductions included in the Tax Cuts and Jobs Act. PTE-eligible S corps, LLCs, partnerships, and possibly others, can elect to pay a PTE tax for the business owner’s share of the business’s qualified net income. This triggers a federal deduction, which reduces the taxable income on your IRS Schedule K1 (Form 1065).
10. Change your sole proprietorship into an S-corp.
In sole proprietorships, business owners pay both self-employment tax and income tax. With an S-corp, you pay tax only on your W2 wages and salary. Making the conversion to an S-corporation is a good way to reduce your tax obligation. When you hire employees, you can show that the business’s income is due to their work, vs. only your own labor. So, the IRS can clearly recognize your own work as other than a wage-earner’s level of contribution to the business’s income, which will generate payroll tax savings, among other financial benefits and legal protections.
11. Above all, get a licensed CPA.
Find the right small business tax expert to advise you. Your bookkeepers may be able to enter income and expense totals on tax forms, but they’re not tax professionals. Get a licensed CPA. Over the years, your CPA service will pay for itself in cumulative tax savings for your business. And, it can help ensure that every dollar is appropriately accounted for and every deduction is properly claimed.
On Your Way to Tax Filing…
Even when you’re working with a licensed CPA, keep your eyes and ears open, and note any recommendations or warnings you discover and discuss them with your accountant. The best professionals don’t miss much, but you’re better off fully understanding all the possibilities that may apply to your tax responsibilities and opportunities now and in the future. So, always, ask questions, claim everything to which you’re entitled without exceeding the limits of your eligibility, and continuously strategize to minimize your tax bill.