A business owner in 2023 learning how a business can save money in taxes using tax planning.

Published

Apr 26, 2023

Author

Jeremy A. Johnson, CPA

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How to Keep Small Business Taxes Low

Sometimes business owners just get it. I ran into a client at the Fort Worth Arts Festival last weekend. He said, “Just a quick check-up,” and asked, “What should I know about how to keep small business taxes low?” That’s the kind of mindset I like to see.

My answer? Check back in with the fundamentals because that’s how small business owners build up an instinct for tax and finance. It’s just like drilling a play or practicing an instrument.

So, let’s not lose what we learned during tax season and get thinking about bread-and-butter tax savings tips and tricks for 2023.

1. Want to get more from your CPA? Become tax-aware.

I’ve written before about why small business taxes are so high, but recently I’ve narrowed down the cause to awareness. Business owners pay more taxes because they are unaware of the tax landscape and don’t know what questions to ask to get better results. You need to increase your tax IQ enough to push your accountant or CPA firm to think creatively.

But what if your accountant or CPA firm is unaware? No sugarcoating it: they are either bad at their job or do not care.

Why are you paying high taxes?

According to the National Federation of Independent Businesses (NFIB), almost half of small businesses are unaware of the Qualified Business Income deduction.¹

Sure, that’s only one deduction, but it’s significant. The Qualified Business Income deduction allows for a 20% deduction of your QBI, plus more in certain situations. If a small business owner isn’t using the QBI, that’s a good sign he or she is missing other savings opportunities too.

2. Start planning for 2023 taxes now

Were you surprised at your tax bill or quarterly estimated payment? If so, listen up.

Here are the facts:

Start planning now, or you will not see a substantial reduction in your business’s tax liability for 2023. More than 20% of businesses don’t know their effective tax rate, according to a CNBC poll. Don’t be one of those businesses.⁴

Call me for tax planning today. Let’s get serious.

Last year’s return offers clues for savings

Now is a great time to review your tax return from last year. Here’s what you can learn:

Tax returns provide a roadmap for keeping this year’s taxes low.
Past returns are especially helpful for analysis (performance, tax efficiency, missed opportunities).
Analysis requires robust knowledge of current Federal tax codes, so 2023 may be the year to work alongside a tax planning expert.

Let’s get into the specific actions I recommend for anyone wondering how to keep small business taxes for 2023.

3. Spending on employees is good for business and taxes

Salaries, wages, bonuses, and other forms of compensation paid to your employees are tax deductible as long as they meet specific criteria:

ordinary and necessary
a reasonable amount
paid for services actually provided
and incurred in the current year.

Attract new talent and save on taxes. It’s a no-brainer in the age of quiet quitting. And compensation isn’t the only way to save on taxes.

4. Start planning to offer retirement plans

Starting a 401(k) contains deductible expenses associated with the plan, including employee contributions and administrative costs.

Running a 401(k) can also help you keep compensation costs low while benefiting employees. For example, contributions to the plan may not trigger payroll taxes on wages.

Do it.

5. Invest in healthcare

Check if you’re eligible for a Health Savings Account (HSA). HSA contributions are tax-deductible as a business expense. There’s the additional benefit of not having to pay employment tax on that amount.²

Take another look at the “Small Business Health Care Tax Credit.”

Your business may also be eligible for the Small Business Health Care Tax Credit, worth up to 50% of the costs you pay for your employees’ premiums. It’s only available for two consecutive tax years, but if you still qualify, it can help your small business save on taxes.

6. Pay attention to the QBI

As I mentioned earlier, about half of small business owners don’t use the qualified business income tax deduction (QBI).

As the IRS states, the QBI deduction is “the net amount of qualified items of income, gain, deduction, and loss with respect to any trade or business.” ³ The 20% deduction of qualified business income is powerful and worth the effort.

7. Don’t miss out on savings from depreciable assets

Does your business depend on tangible assets such as office equipment, electronics, appliances, tools, research-based and heavy equipment, industrial machinery for manufacturing, commercial and residential real estate, and furniture?

You can recover the cost using that asset. It’s essentially an IRS allowance for wear and tear, deterioration, or obsolescence.

Why depreciation is a valuable tool for saving on taxes

Depreciation reduces taxable income, which lowers tax liability. The amount of depreciation that can be claimed in any given year, and depends on the type of asset and its useful life.

Takeaway: depreciation is tax deductible. It’s a form of tax deduction that reduces a business’s annual taxable income and encourages you to invest in assets you need to grow. And yes, you can apply depreciation to your vehicle.

Tax Planning. Tax Planning. Tax Planning.

Tax planning is a year-round activity that produces a comprehensive but adaptable roadmap to tax efficiency for your business, yourself, and your family. It’s more than the now; it’s a lifetime of business and personal tax savings, asset protection, and wealth.

How can businesses save on taxes? Start with a tax plan.

Get a proactive and strategic tax plan

Let’s break down “proactive” and “strategic.”

Proactive tax planning looks to the future for opportunities, from changes in tax law to changes in your business and how to leverage those changes to reduce taxes. It prepares your business for future payments and gives you the confidence to spend what it takes to grow.

What do I mean by “strategic?” A strategic tax plan is more than a collection of independent tax-saving tactics. Instead, a strategic tax plan starts with short and long-term targets, goals, and outcomes and uses tax-saving tactics to build a unified strategy.

Earlier, I mentioned a client who asked me how to keep small business taxes low. My response: “Tax” and “Planning.” He said, “Yes.” For 2023, no matter who you decide to work with, say “Yes.”

Maintain your records

Good records help you avoid financial headaches and save time when tax season rolls around. Up-to-date records enable you to track your income and expenses in real time, empowering you to make informed decisions.