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5 Small Business Tax Tips for Business Owners

5 Small Business Tax Tips for Business Owners
Lauren Ward
Lauren WardUpdated November 15, 2021
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Being a small business owner can be expensive. And, it can be even more expensive if you end up paying more than you owe in taxes at the end of the year.That’s why one key tax tip for small businesses is to hire a trustworthy, skilled accountant to assist you with your taxes. A certified public account (CPA) or tax advisor can help make sure you don’t miss out on any credits and deductions you’re entitled to, and also help you manage your business finances throughout the year. Below are five other smart tax moves for small business owners that can help minimize your tax liability this year — and beyond.Recommended: 9 Accounting Basics Every Small Business Owner Should Know 

What Are Some Business Tax Saving Tips?

Going through each of the small business tax tips below can help you avoid overpaying when it comes time to file.

1. Properly Classifying Your Business

One of the most common small business mistakes is not classifying your business properly. This can lead to paying higher taxes than necessary.Most small businesses are classified as pass-through businesses, meaning all money made flows through the owners and is then taxed as personal income. This includes: sole-proprietorships, S-corporations, limited liability companies, and partnerships. C-corporations’ profits, on the other hand, are subject to corporate income tax. When picking a business structure, however, you may want to consider changing your status from a pass-through business to a C-corporation. Due to a 2017 reduction in income tax rates for all C-corporations, it’s possible that making the switch could lower your tax liability. 

2. Researching Tax Credits

Tax credits are valuable because they reduce your tax bill dollar for dollar. In other words, a $1,000 tax credit saves you $1,000 in taxes.  Since these credits tend to come and go, it can be a good idea to stay on top of which ones are currently active by checking the IRS’s business tax credits page. Some business tax credits you may be able to take advantage of include:
  • Disabled Access Credit Companies that make their business more accessible to customers with disabilities may receive a tax credit for any year they have any expenditures related to providing disabled access points. 
  • Increasing Research Activities If your company is engaged in any research and development (R&D) for a new product or manufacturing process, or for improving a product’s quality, then you may qualify for this tax credit
  • Work Opportunity Tax Credit (WOTC) This is a Federal tax credit available to employers for hiring people who have consistently faced barriers to employment.  If you employ veterans, ex-felons, or anyone that is on the IRS's list of targeted groups, you may be able to receive a tax credit for that employee’s qualified wages.

3. Knowing Which Expenses are Deductible

As a small business, many of your expenses are deductible, which means they can be used to lower your taxable income. To be deductible, however, a business expense must be both ordinary (meaning common in your industry) and necessary, according to the IRS. Here are a few you may be able to take advantage of.
  • Home office deduction If you run a small business from home, and it’s your principal place of business, you may be able to deduct a portion of your home ownership or rental expenses. For this deduction to work, the home office needs to be used regularly and exclusively for the business. 
  • Business vehicle deduction If your car is 100% used for business, you may be able to deduct all of the costs of ownership and operation (within limits). If it’s used for both personal and business, you may be able to deduct a portion of its costs. 
  • Charitable deduction Your small business may be able to receive a tax deduction for making charitable donations of money, stocks, or goods. You typically can’t receive a tax deduction for donating services, though you may be able to deduct expenses related to the donation, such as travel or materials. If you own a pass-through business, your ability to deduct charitable gifts made by the business could be limited.

4. Understanding How Your Loans Are Taxed

If you have taken out a small business loan loan from a true lender (meaning not a family member or friend), then you will likely be able to deduct the interest you pay on that loan. This small business tax tip generally applies to any type of business loan on the market, including:Short-term loans: Because short term loans are typically taken out and paid back within the same calendar year, deducting the interest you paid is typically straightforward. If the loan bleeds into a new calendar year, then you may have to calculate how much interest was paid in one year, and how much was paid in the next. Personal loans: For personal loans taken out to pay for business expenses, you can generally deduct all interest for the amount of the loan that was used for your company. For example, if you used half of the loan to help with your business but the other half to pay for your child’s college tuition, then you could only deduct half of the interest from the personal loan. The amount you deduct must be proportional to what you used for your small business.Business lines of credit: A business line of credit is like a credit card in that you take out only what you need when you need it. It’s also like a credit card in that you only pay interest on the amount you use. Fortunately, any interest you pay on a business line of credit is tax typically deductible. Term loans: Term loans are paid for over a number of years, so to calculate how much interest you pay in a given year you will likely have to review your amortization schedule. The amount of interest you pay in a given year may be tax deductible.Economic Injury Disaster Loans (EIDL): Economic Injury Disaster Loans (EIDL) have been sought out by businesses impacted by COVID-19. EIDL is a repayable loan, so just like any other loan, EIDL loans are not taxable. More good news: You may be eligible to take a qualified business income deduction for the interest paid on the EIDL.

5. Setting Up -- or Adding to -- a Retirement Account

On top of contributions to a personal IRA, small business owners may also be able to use a variety of employer-sponsored retirement savings plans, such as SIMPLE IRA, SEP IRA, 401(k), and profit-sharing plans. With any of these plans, contributions you make for yourself and your employees may be tax-deductible. Small businesses may also be able to get a tax credit to help cover some of the cost of starting a retirement plan.

Loans For Starting a Small Business

If you’re interested in getting a loan to grow your business -- while also getting some tax relief -- there are many different types of business loans you can consider. Which one is best for you will depend on your credit profile and your type of business. Below are some small business financing options you may want to consider.

SBA Microloans

The SBA microloan offers loans up to $50,000 for start-up small businesses or existing small businesses looking to expand. The average microloan is about $13,000. These loans are administered by intermediary lenders, each of which has its own lending and credit requirements. All require some sort of collateral, but you won’t know what requirements you need to meet until you’re actually working with a lender.SBA microloans can be used for everything from inventory to equipment to working capital. They cannot be used to purchase real estate or pay off existing debts. 

SBA Community Advantage Loan

You can borrow as much as $250,000 with a Community Advantage loan if you plan to open your business in an underserved market. The maximum interest rate is only the prime rate plus 6%, which is typically better than most personal loans. Though the possible loan amounts are significant, this type of loan is unique in that you have to make a down payment to access the funds. Loans $150,000 or less require a down payment of 15% of the loan amount, and loans greater than $150,000 need a down payment of 10%. This program is set to expire on September 30, 2022, so if you’re interested and you have the capital for a down payment, you may want to consider applying as soon as possible.

SBA 7(a) Loan

The SBA’s 7(a) loan can be used for purchasing real estate, paying off debt, providing working capital, and purchasing necessary business supplies, machinery, and fixtures. It’s possible to obtain a maximum loan amount of $5 million, but to get this large of an amount you’ll likely have to show that your business is already profitable or prove that it very easily could be. As with the Community Advantage SBA loan, you will have to put up some capital before you can access the funds. Loans under $150,000 require a down payment of 15%, while loans greater than $150k require a down payment of 25%. 

Personal Business Loans

If you have a solid income and a strong credit score, you may want to consider getting a personal business loan from either an online lender or local bank or credit union. Rates may be higher compared to SBA loans, so it can be smart to compare multiple options.

The Takeaway

If you’re a small business owner, there are many opportunities to lower your tax bill each year. Understanding the various tax tips for small businesses can help you avoid overpaying come tax time, and also help guide your business decisions throughout the year. Thinking about taking out a loan to grow your business? The interest on that loan may be tax-deductible as a business expense. Use Lantern by SoFi to explore options from multiple lenders without any type of commitment.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Photo credit: iStock/paulaphoto

About the Author

Lauren Ward

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
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