7 smart tax tips for small business owners

Highlights

• When you plan ahead for your small business taxes throughout the year, you can make the filing process much easier.
• Reinvesting in your business is a great way to save on taxes while also increasing profits in the long run.
• The right software can help you track and automatically categorize your expenses, leading to more deductions and a smoother filing process.

As a business owner, it can sometimes feel overwhelming to keep up with all of the requirements of small business tax preparation. But if you’re prepared and make meaningful changes throughout the year, tax season won’t be a source of stress.

The following tips can help you save time and money by keeping you organized and compliant. Even if you’ve been in business for a while and have seen many tax seasons come and go, you may still benefit from this info—and number five might surprise you!

1. Close your books every month

Staying on top of your books is probably the most important thing you can do for small business tax planning. If you close your books every month, it will make tax season easier in several ways, including:

• More accurate recordkeeping
• Early detection of discrepancies
• Better cash flow management
• Increased organization

If your company’s finances are a garden, then regularly closing the books is like weeding and tending to the plants. If you only do it once a year, your garden will be overgrown, unkempt, and difficult to manage.

The same goes for your small business’ finances. By closing the books every month (or, if that’s too challenging, at least once a quarter), you can keep your financial records accurate, up to date, and organized, making tax season less stressful and more manageable.

2. Pay your quarterly estimates on time

As small business owners know, taxes aren’t just a yearly challenge—they have to be paid quarterly in order to be compliant with federal laws. And failing to pay taxes on time can result in penalties and interest charges.

In addition, paying taxes quarterly allows small businesses to spread out their tax payments throughout the year, reducing the risk of having a large tax bill due at year-end that might be difficult to pay all at once.

Making payments on time can also ensure that you’re providing accurate records of tax payments, reducing the risk of errors, and making the tax return preparation process smoother and more efficient.

3. Reinvest in your business and save on taxes

Taking your profits and putting them back into your business can lead to tax savings by reducing your taxable income. This can be achieved through expenses such as purchasing new equipment or upgrading existing infrastructure.

Additionally, reinvesting in the business can increase its value and potentially generate higher profits in the future.

Be sure to talk to an accountant or tax professional to make sure that investing in business growth is properly documented and eligible for tax deductions.

4. Know what you can write off

There are some common misconceptions about what counts as a tax write off for small businesses. For example, if you have a business lunch that costs $100, you might think that you can write off all $100 from your taxes—but normally, you can only write off 50% of it.

There is one exception though: if the business meal occurred between December 31, 2020, and January 1, 2023, you can write off 100% of the value. So be sure to take advantage of that when you file your tax return in 2023!

This is why it’s so important to understand deductions. Knowing what actually counts for a write-off helps with tax compliance and can even save you money by lowering your tax bill.

Accounting software and expense management software can make a big difference. When you classify your spending throughout the year, you’ll be able to go back and refer to those purchases and make sure you know exactly what you are deducting.

Check out the summary and the linked guide below to see what deductions you might qualify for this tax year.

Small business tax write offs

There are several different kinds of expense you can claim as deductions on your small business taxes, including:

• Mileage and vehicle expenses
• Rent and utilities
• Marketing
• Employee pay and benefits
• Gifts to vendors and suppliers
• Miscellaneous or general office expenses
• Charitable contributions
• Home office and other home expenses

Learn more about business tax deductions.

What’s the difference between tax deductions and tax credits?

A tax deduction lowers your taxable income. For example, a $100 tax deduction against $10,000 of taxable income would lower taxable income to $9,900. If your tax rate was 30%, that would save you $30 in taxes.

Tax credits make a much bigger impact, because a $100 tax credit lowers your total taxes due by $100. The IRS has more details about tax credits that might benefit your business.

5. Offer your employees a 401k plan

Did you know that a small business’ 401k match is typically entirely tax deductible?

In decades past, it was sometimes considered an expensive move to offer employees a 401k—but that’s usually not the case anymore. Now, setup is often free, and enrolling employees often costs only a few dollars per individual.

In addition to being cost-effective, a 401k plan can also have a positive impact on employee morale. It shows that the company cares about their future financial wellbeing. This, in turn, can lead to increased job satisfaction and your company’s ability to attract and retain quality talent.

6. Understand bonus depreciation

Looking for more ways to decrease your small business taxable income? Then you need to find out if your business qualifies for bonus depreciation.

According to the IRS: “Bonus depreciation allows taxpayers to deduct a specified percentage (30, 50, or 100 percent) of depreciation in the year the qualifying property is placed in service.”

Not all property is eligible for this tax incentive. In order to qualify for 30, 50, or 100 percent bonus depreciation, the IRS says this property must meet these criteria:

• The original use of the property must begin with the taxpayer
• The property must be either:
• MACRS (Modified Accelerated Cost Recovery System) property with a recovery period of 20 years or less
• Depreciable computer software
• Water utility property
• Qualified leasehold improvement property

In plain English, this means that if you’re getting toward the end of the tax year, you can buy some new qualifying equipment and offset some of your taxes.

However, it’s important to note that the specifics of bonus depreciation, such as the amount that can be deducted and the types of property that qualify, can change from year to year. It’s best to consult an accountant to fully understand the rules before taking advantage of these tax incentives.

7. Use software to track expenses

Expense management software can help save time and money—and be a big help during tax season. This type of software can automate the process of tracking and categorizing expenses, reducing the risk of errors and ensuring that all eligible expenses are thoroughly documented.

In addition, if your expense management solution can generate useful reports, such as automatic expense reports, it will become easier to understand possible tax liability throughout the year. This streamlining can help you avoid costly mistakes and help you spend less time on administrative tasks.

How to file small business taxes

Not all businesses file taxes the same way—the process depends on your business structure, business size, and other details. The IRS has many tax resources for small businesses, so that’s a great place to get started.

The basic steps for filing small business taxes are:

1. Keep in mind your business structure. Your business structure will help determine what tax forms you need to file.
2. Gather your financial records. This includes all reports on income and expenses.
3. Determine your taxable income. You can work with an accountant to determine your tax credits, deductions, and total taxable income.
4. Know your due dates. Keep an eye on the tax calendar for your business structure to make sure you’re on time.

You can also check out our guide to filing taxes when self-employed, and our tips for filing taxes as an independent contractor.

Take control of your taxes

As a small business owner, it’s important to stay informed and ahead of tax requirements. With the right preparation, tax season won’t be overwhelming. By considering these tips, you can ensure that you’re on track to meet your tax obligations on time.

And with smart software, such as BILL Spend & Expense, you can keep track of your spending all year long. This means you’ll be prepared to file your taxes every year, without hunting down receipts.