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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.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. While the corporate tax isn’t as high as it used to be (now 21%), it’s added to all business income before it gets passed on to owners, called shareholders. When profits are distributed to owners, they are taxed again as personal income. This is something you’ll want to consider when choosing your business structure.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 Credit 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.
- Business Meals As a small business, you can deduct 50% of food and drink purchases that are related to your business for 2023. Most entertainment expenses are not deductible. However, food you supply for employee events, such as holiday parties and team-building events are generally 100% deductible.
- Work-Related Travel Expenses You may be able to deduct all expenses related to business travel if the trip took you away from home and was necessary for your business. This can include airfare, hotels, rental car expenses, tips, dry cleaning, meals, and more.
- The Qualified Business Income (QBI) Deduction The qualified business income (QBI) deduction enables small business owners and people who are self-employed to deduct up to 20% of their qualified business income on their taxes. For 2023, total taxable income must be under $182,100 for single filers and $364,200 for joint filers to qualify.
4. Understanding How Your Loans Are Taxed
If you have taken out a small business 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 If you used a personal loan to pay for business expenses (note that not all lenders allow this), 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 often 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.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. Interest rates are set by the lender, but subject to SBA maximums. For loans of $50,000 or less, the interest can’t be more than the prime rate plus 6.5%. For loans greater between $50,000 and $250,000, the rate can’t exceed prime rate plus 6%. And for loans between $250,000 and $350,000, it can’t be more than prime rate plus 4.5%.This program is set to expire on September 30, 2024.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. 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. Also keep in mind that not all lenders allow you to use a personal loan for business purposes.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’s fast online search tool to get a personalized small business loan option in minutes.Let Lantern help you find the right financing solution for your small business. Photo credit: iStock/paulaphoto
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About the Author
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.
