Why Tax Planning Should Be Year-Round
For many small business owners, tax considerations only come into focus during the annual rush to file returns. This reactive approach often leads to missed opportunities and higher tax bills. At Coyote Bookkeeping, we advocate for proactive, year-round tax planning that can significantly reduce your tax burden while keeping you fully compliant with tax laws.
Effective tax planning isn't about aggressive schemes or questionable deductions—it's about understanding the tax code and structuring your business activities to take advantage of legitimate tax benefits. In this article, we'll explore practical strategies that can help your small business legally minimize tax liability and keep more of what you earn.
Choose the Right Business Structure
One of the most fundamental tax planning decisions is selecting the appropriate business structure. Each entity type—sole proprietorship, partnership, LLC, S corporation, or C corporation—has different tax implications.
The S Corporation Advantage
For many small businesses, electing S corporation status can provide significant tax savings. As an S corp, you can:
- Pay yourself a reasonable salary (subject to employment taxes)
- Take additional profits as distributions that aren't subject to self-employment taxes
For example, if your business generates $150,000 in profit, you might pay yourself a $90,000 salary (subject to FICA taxes of 15.3%) and take the remaining $60,000 as a distribution (not subject to self-employment tax). This structure could save you over $9,000 in taxes compared to operating as a sole proprietorship.
When to Consider a C Corporation
With recent corporate tax rate reductions, C corporations have become more attractive for some businesses, especially those that:
- Need to reinvest significant profits back into the business
- Plan to take advantage of certain fringe benefits
- Have long-term growth and exit strategies
However, C corporations face potential double taxation (corporate tax plus personal tax on dividends), so this structure requires careful consideration.
Maximize Business Deductions
Every legitimate business expense you can document reduces your taxable income. Here are some commonly overlooked deductions:
Home Office Deduction
If you use part of your home regularly and exclusively for business, you may qualify for the home office deduction. You can choose between:
- Simplified method: Deduct $5 per square foot of your home office (up to 300 square feet)
- Regular method: Deduct the actual expenses of your home office based on the percentage of your home used for business
Vehicle Expenses
Business-related driving can generate substantial deductions. You can choose between:
- Standard mileage rate: Deduct a set amount per business mile (65.5 cents per mile for 2023)
- Actual expense method: Deduct the business percentage of all vehicle expenses, including gas, maintenance, insurance, and depreciation
Travel, Meals, and Entertainment
While the rules have tightened in recent years, you can still deduct:
- 100% of business travel expenses, including airfare, hotels, and rental cars
- 50% of business meals with clients or prospects (100% for certain restaurant meals through 2022 under COVID relief provisions)
- 100% of meals provided to employees on the business premises for the convenience of the employer
Technology and Equipment
Take advantage of Section 179 expensing and bonus depreciation to immediately deduct the cost of qualifying equipment, furniture, and technology purchases rather than depreciating them over several years.
Strategic Timing of Income and Expenses
The timing of when you recognize income and incur expenses can significantly impact your tax bill.
Defer Income
If you expect to be in the same or lower tax bracket next year, consider:
- Delaying billing for services until late December so payment arrives in January
- Postponing the sale of appreciated assets until the next tax year
- For cash-basis businesses, waiting until January to deposit December checks
Accelerate Expenses
Conversely, you may want to accelerate deductions into the current year by:
- Prepaying deductible expenses like rent, insurance, or subscriptions
- Stocking up on supplies before year-end
- Making planned equipment purchases in December rather than January
Note that these strategies should be reversed if you expect to be in a higher tax bracket next year.
Retirement Planning as a Tax Strategy
Retirement plans offer dual benefits: they help secure your financial future while providing immediate tax advantages.
Solo 401(k)
Self-employed individuals can contribute up to $22,500 (for 2023) as an employee, plus an additional 25% of compensation as an employer, up to a total of $66,000. If you're over 50, you can make an additional $7,500 catch-up contribution.
SEP IRA
Simplified Employee Pension (SEP) IRAs allow contributions of up to 25% of compensation or $66,000 (for 2023), whichever is less. These plans are particularly easy to set up and administer.
Defined Benefit Plans
For high-income business owners nearing retirement, defined benefit plans can allow for much larger tax-deductible contributions—potentially over $300,000 annually—though they require more complex administration.
Hire Family Members
Employing family members can create tax advantages for both you and your relatives.
Hiring Your Children
If you hire your children under 18 in a sole proprietorship or family partnership:
- Their wages are exempt from FICA taxes
- They can earn up to the standard deduction ($13,850 for 2023) tax-free
- Your business gets a deduction for their wages
This strategy effectively shifts income from your higher tax bracket to their lower one, while teaching valuable business skills.
Hiring Your Spouse
Employing your spouse can allow you to:
- Establish a medical reimbursement plan covering your family
- Increase retirement plan contributions
- Split income between two Social Security earnings records
Health Insurance and Medical Expense Strategies
Healthcare costs represent a significant expense for most business owners, but several tax strategies can help.
Health Savings Accounts (HSAs)
If you have a high-deductible health plan, you can contribute up to $3,850 for individual coverage or $7,750 for family coverage (2023 limits) to an HSA. These contributions are tax-deductible, grow tax-free, and can be withdrawn tax-free for qualified medical expenses.
Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)
Small employers (fewer than 50 full-time employees) can reimburse employees for individual health insurance premiums and qualified medical expenses through a QSEHRA, providing tax benefits for both the business and employees.
Self-Employed Health Insurance Deduction
Self-employed individuals can deduct 100% of health insurance premiums for themselves, their spouse, and dependents as an above-the-line deduction, reducing both income tax and self-employment tax.
Tax Credits vs. Deductions
While deductions reduce your taxable income, tax credits directly reduce your tax bill dollar-for-dollar, making them even more valuable. Key small business tax credits include:
Small Business Health Care Tax Credit
Businesses with fewer than 25 full-time equivalent employees may qualify for a credit of up to 50% of employer-paid health insurance premiums.
Research and Development (R&D) Tax Credit
If your business develops new products, processes, or software, you may qualify for the R&D credit, which can offset payroll taxes for startups or income taxes for established businesses.
Work Opportunity Tax Credit
Hiring individuals from certain target groups, such as veterans or long-term unemployed, can qualify your business for credits ranging from $2,400 to $9,600 per eligible employee.
Year-End Tax Planning Checklist
As the year draws to a close, use this checklist to identify last-minute tax-saving opportunities:
- Review your business structure to ensure it's still optimal for your situation
- Analyze your projected income and consider deferral or acceleration strategies
- Maximize retirement plan contributions
- Consider year-end equipment purchases that qualify for Section 179 expensing
- Review outstanding receivables and consider writing off bad debts
- Evaluate inventory for obsolescence and potential write-downs
- Make charitable contributions from your business
- Schedule a planning meeting with your tax professional
The Importance of Professional Guidance
While this article provides valuable strategies, tax planning should be customized to your specific situation. Working with a knowledgeable tax professional can help you:
- Identify the strategies most relevant to your business
- Ensure compliance with complex and changing tax laws
- Develop a comprehensive tax plan that aligns with your business goals
- Stay updated on new tax-saving opportunities
Start Your Tax Planning Today
At Coyote Bookkeeping, we believe that effective tax planning is a year-round process that should be integrated into your overall business strategy. Our team specializes in helping small business owners navigate the tax code to legally minimize their tax burden while maintaining full compliance.
Don't wait until tax season to start thinking about tax strategies. Contact us today to schedule a tax planning consultation and take proactive steps to reduce your tax liability and keep more of your hard-earned money.
