Preface: “Taxes are what we pay for civilized society.” — Oliver Wendell Holmes, Jr., U.S. Supreme Court Justice
2024 Tax Planning – Ideas for Business Owners to Save on Taxes
As a business owner, you’re always looking for ways to reduce costs, and taxes can be one of the biggest expenses you face each year. While paying taxes is inevitable, there are numerous strategies to reduce your tax burden legally and efficiently. By understanding the tax code, planning, and leveraging available deductions, you can retain more of your profits. Here are several creative and effective ways business owners can save on taxes:
1. Take Advantage of Business Deductions
One of the most straightforward ways to save on taxes is by maximizing your business deductions.
Any expense that is “ordinary and necessary” to running your business is typically tax-deductible. These can include:
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- Office supplies, equipment, and software
- Marketing and advertising costs
- Utilities and rent for office space
- Insurance premiums
- Professional services like legal and accounting fees
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The key here is diligent record-keeping. By tracking all of your expenses, you can ensure that you capture every deduction available.
2. Claim Home Office Deduction
If you operate your business from a home office, you can claim a portion of your home expenses as a deduction. The IRS allows you to deduct expenses related to your home office, such as a percentage of your mortgage or rent, utilities, and maintenance. The space must be exclusively used for business purposes to qualify. This deduction can be substantial, especially for business owners who work primarily from home.
The home office deduction can be calculated using either the simplified method (a flat rate of $5 per square foot of your home used for business, up to 300 square feet) or the regular method, which involves calculating actual expenses based on the percentage of your home devoted to business.
3. Set Up a Retirement Plan
Business owners can reduce their taxable income by contributing to retirement accounts. There are several retirement savings options available for small business owners:
SEP-IRA (Simplified Employee Pension): Allows you to contribute up to 25% of your net earnings from self-employment, up to $69,000 for 2024.
Solo 401(k): Ideal for sole proprietors or businesses without employees, allowing contributions up to $69,000 (or $76,500 if you’re over 50).
SIMPLE IRA: A good option for businesses with employees, where you can contribute up to $16,000 ($19,500 if over 50) as an employee and provide matching contributions.
By setting up a retirement plan, not only are you investing in your future, but you’re also reducing your taxable income in the present.
4. Take Advantage of Section 179 Deductions
Section 179 of the tax code allows businesses to deduct the full purchase price of qualifying equipment and software in the year it is placed in service. This immediate deduction can be a huge tax saver for business owners, especially those making significant equipment purchases. For 2023, the maximum deduction is $1,220,000, with a spending cap of $3,050,000. This deduction is designed to encourage businesses to invest in equipment and technology that will drive growth.
Whether you’re buying machinery, computers, or vehicles for business purposes, Section 179 is an excellent way to lower your tax liability quickly.
5. Hire Family Members
Hiring family members, such as your spouse or children, can be a savvy tax-saving strategy. If your spouse works in the business, you can contribute to retirement accounts on their behalf, thereby doubling your contributions.
For children, the IRS allows business owners to employ their children without being subject to payroll taxes, as long as they are under 18 and the business is a sole proprietorship or partnership. The wages you pay your children are tax-deductible, reducing your business’s taxable income.
The income paid to your children can also be taxed at their lower income tax rate, which could further reduce the overall family tax burden.
6. Utilize the Qualified Business Income (QBI) Deduction
The 199A tax deduction, also known as the Qualified Business Income (QBI) Deduction, is a tax provision that provides a potential tax break for business owners by allowing them to deduct up to 20% of their qualified business income (QBI) from certain pass-through entities. The deduction is available through 2025 unless extended by future legislation.
Here’s what you need to know about the 199A tax deduction for 2024:
1. Eligibility for the 199A Deduction
The 199A deduction is available to owners of pass-through businesses. These include:
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- Sole proprietorships
- Partnerships
- S Corporations
- Limited Liability Companies (LLCs)
- Certain trusts and estates
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Pass-through businesses are those where the income “passes through” to the owner’s personal tax return, rather than being taxed at the corporate level.
2. Qualified Business Income (QBI)
The 199A deduction is based on Qualified Business Income (QBI), which is the net income earned from your business, excluding certain items like:
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- Capital gains and losses
- Interest income
- Dividends
- Wages earned as an employee
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In simple terms, QBI is the profit from your business after deducting ordinary expenses. The deduction allows you to potentially exclude up to 20% of this income from taxation.
7. Deduct Health Insurance Premiums
Self-employed business owners can deduct health insurance premiums for themselves, their spouses, and their dependents. This deduction is “above the line,” meaning you don’t need to itemize to claim it. For businesses with employees, providing health insurance can also result in additional deductions and tax credits, such as the Small Business Health Care Tax Credit, which can cover up to 50% of health insurance premiums paid for employees. To qualify in Pennsylvania, you must meet the following parameters:
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- Have fewer than 25 full-time employees;
- The average employee salary for your business is roughly $50,000 per year or less;
- You offer health insurance coverage to full-time employees through the SHOP Marketplace;
- You pay at least 50 percent of your full-time employee’s premium costs.
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8. Leverage Depreciation Deductions
In addition to Section 179, businesses can also benefit from bonus depreciation. For 2024, businesses can write off 60% of the cost of qualifying assets in the first year. Depreciation deductions apply to assets with a useful life of more than one year, such as vehicles, machinery, and buildings. By accelerating depreciation, you can reduce taxable income now, rather than spreading the deduction over several years.
9. Charitable Contributions
If your business supports charitable causes, you can deduct charitable contributions made to qualifying organizations supporting your local community or overseas. Businesses structured as corporations can deduct up to 10% of their taxable income to these organizations and non-profits, while pass-through entities can deduct donations through the individual tax return of the business owner on Schedule A.
10. Keep an Eye on Tax Credits
Tax credits are often more valuable than deductions because they directly reduce the amount of tax owed, rather than just lowering taxable income. Some credits available to businesses include:
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- Research and Development (R&D) Credit: For businesses investing in new technologies or improving products.
- Work Opportunity Tax Credit: For hiring individuals from certain target groups, such as veterans or long-term unemployed.
- Energy Efficiency Credits: For businesses that invest in energy-efficient buildings or renewable energy.
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Conclusion
As a business owner, there are countless ways to save on taxes through careful planning and smart financial decisions. By understanding the deductions and credits available to you, leveraging tax-advantaged retirement plans, and being strategic about your purchases and staffing, you can significantly reduce your tax liability while ensuring the long-term success of your business. Always consult with a CPA or tax professional to ensure you are compliant with IRS regulations and are making the most of the tax-saving opportunities available to you.