When you are self-employed, minimizing taxes is one of the best ways to increase the net profitability of all your hard work. Be proactive and work with your accountant during the year to develop a plan that helps you keep more of your hard-earned money.
At My Fiscal Office, we have instituted a proactive tax planning and tax strategy review to help our clients. Here are a few of our favorite opportunities to review
Estimate Your Self-Employment Income
If you have a large amount of income from investments each quarter, we’re going to reach out to you to discuss estimated taxes.
You could be having a record breaking year or a below-average year. Understanding your 2023 income will help determine how aggressive you should be with tax planning before the year’s end.
Your Business Setup
Are you running a sole proprietorship or another business entity? Running your business as an S-Corp, LLC, Partnership, or C-Corp could lower your tax liabilities. If you are earning $100,000 (or less), the time and effort (and cost) of setting up an S-Corp likely isn't worth it. However, the tax-planning benefits increase by incorporating your business as your income grows.
This is why at My Fiscal Office, we are adding entity selection as a standard review item for our self-employed clients. In a related issue, the IRS is starting to look more closely at responsible compensation for S-Corp owners. So, we review that annually as well.
The Ins-and-outs of Your Retirement Plan
Maximizing the benefits of a small business retirement plan is a great way to minimize your taxes each year and increase your financial security in retirement. Here are a few of the most common retirement plans for small-business owners.
- SEP-IRA: if you are self-employed, you can contribute up to $66,000 for 2023. A SEP-IRA can be set up and funded just before filing your taxes for the previous year so we often pair this with strategic extensions.
- Solo 401(k): Allows contribution up to $22,500 for 2023 plus a $6,500 catch-up contribution if you are over 50.
- Cash Balance Pension Plan: For business owners looking to save even more, the Cash Balance Plan and 401K combo could shelter several hundred thousand dollars in income each year. Defined benefit pensions are the most complicated of the small business retirement plans but if you are already maxing your 401(k) and want to save even more, this could help you do so.
Your Qualifications for the Home Office Deduction
The pandemic has led many more businesses to be run from home. If this sounds like you, your business may be eligible for the home office tax deduction. The great thing about this tax break is you are already spending the money on your home and other expenses like utilities and internet. The downside is that if you own your home, there is the depreciation issue which could lead to higher taxes when you sell your home.
This is why we help many clients set up accountability plans. An accountable plan enables you to reimburse yourself and your employees from your business entity. The important point is the word “employee.” To take advantage of an accountable plan, you must be an employee of your business. Which is another reason why entity selection is critical.
Planning of Big Purchases
We don’t recommend spending money just to save taxes, but you can be strategic about the timing of when you purchase the stuff your business needs.
If your income is higher in 2023 than expected in 2024, you will likely want to make purchases now. On the other hand, if your income may be substantially higher next year, you may want to put off large purchases.
Along with bonus depreciation and Section 179 depreciation, you may be able to write off most of your asset purchases in one year. You must be profitable to take the Section 179 deduction. But with bonus depreciation, there is no business income limitation. You could take a net loss if you decide to take advantage of bonus depreciation. You must first take Section 179. Anything over the $1,080,000 limit can then be taken in bonus depreciation.
Most Importantly: Keeping Up With Your Bookkeeping
We saved the best tip for last. You need to track your spending to avoid missing valuable tax deductions. Bookkeeping isn't fun, but neither is overpaying your taxes. Plan to spend a little time throughout the year to stay updated on your bookkeeping (or hire My Fiscal Office to do it for you).
If you want to reduce your taxes and have year-round numbers that you can use to propel your business forward - CLICK HERE - to book a time to discuss how we can help.
