As the year draws to a close, small business owners have a great opportunity to plan for tax season by taking advantage of essential tax deductions. Effective tax planning can significantly reduce your taxable income, keeping more money in your business. Here’s a list of high-impact deductions that are often missed. Each one has unique benefits, so discuss these options with your CPA to ensure they’re applied correctly. Our team is here to help with tailored tax planning – reach out today to maximize your savings.
- Home Office Deduction
If you use a dedicated space in your home exclusively for business, the home office deduction can be a valuable tax-saving strategy. This deduction applies whether you own or rent, and it allows you to deduct a portion of your mortgage or rent, utilities, repairs, and other expenses based on the square footage used for business.
The IRS provides two methods to calculate this deduction:
- Simplified Method: You can deduct $5 per square foot of office space, up to 300 square feet, for a maximum of $1,500. This method is straightforward and requires minimal paperwork.
- Actual Expenses Method: This option may provide a larger deduction, as it allows you to calculate a percentage of each eligible expense based on your office’s proportionate square footage within your home. Although it requires detailed record-keeping, this method can be advantageous if you have high home expenses.
Both methods are useful in different situations, so consult with your CPA to determine which method is right for your business.
- Continuing Education and Professional Development
Educational expenses that improve or maintain your skills in your current business can often be deducted. This includes certifications, industry courses, conferences, and professional memberships. As long as the education directly benefits your business and does not qualify you for a new trade, these costs may help reduce your tax burden.
Expenses like tuition, course fees, books, and supplies are usually deductible, but documentation is key. Keep detailed records of all professional development expenses to ensure eligibility. If you’re investing in your professional growth, this is a powerful deduction that directly supports your business.
- Health Insurance Premiums Deduction
Health insurance premiums can be one of the most valuable deductions for self-employed small business owners. Premiums you pay for health insurance coverage for yourself, your spouse, and dependents may be fully deductible, lowering your taxable income.
For S-Corporation owners, health insurance premiums must be paid directly by the business and reported on the owner’s W-2 as taxable income to qualify for this deduction. While this may sound counterintuitive, it allows the premiums to be deductible at the business level. Given the rules and potential tax savings, it’s helpful to work with a CPA to ensure you meet the requirements.
- Retirement Contributions for Small Business Owners
Making retirement contributions is a smart way to secure your financial future while reducing your current-year tax bill. Several retirement plan options are available for small business owners, and each has different contribution limits and tax advantages:
- SEP IRA: The Simplified Employee Pension (SEP) IRA allows you to contribute up to 25% of your net earnings from self-employment, with a cap of $66,000 for 2023. SEP IRAs are easy to set up, require little maintenance, and allow for flexible contributions based on your business’s performance. Contributions for 2023 can be made until the tax filing deadline (including extensions).
- Solo 401(k): Designed for self-employed individuals, a solo 401(k) allows you to contribute both as an “employee” (up to $22,500 in 2023, or $30,000 if over 50) and as an “employer” (up to 25% of your earnings), with a combined maximum of $66,000. This high limit makes solo 401(k)s an excellent option for profitable years and offers more flexibility if you want to make large contributions.
- Defined Benefit Plan: For business owners with steady cash flow who want to contribute substantially to retirement, a defined benefit plan offers the highest potential deduction. Contributions are based on factors like age, income, and desired retirement benefits, and while these plans are more complex and have strict funding requirements, they can provide substantial tax benefits.
Consulting with your CPA can help you select the best retirement plan based on your business’s cash flow, goals, and tax strategies.
- Depreciation on Equipment and Section 179 Deduction
When your business purchases equipment, furniture, or machinery, the Section 179 deduction can provide substantial tax savings by allowing you to immediately expense the cost of qualifying assets rather than spreading it over years. For tax years beginning in 2024, the maximum Section 179 expense deduction is $1,220,000, with a phase-out threshold at $3,050,000 for total eligible property placed in service during the year. The Section 179 deduction for sport utility vehicles (SUVs) is capped at $30,500 for 2024.
If certain assets don’t qualify for full Section 179 expensing, the Special Depreciation Allowance (or bonus depreciation) may apply. For 2024, the special depreciation allowance is 60% for qualified property acquired after September 27, 2017, and placed in service after December 31, 2023, and before January 1, 2025. Certain property with a long production period and specific aircraft are eligible for an 80% depreciation allowance. The special depreciation allowance is also available at 60% for specific plants bearing fruits and nuts.
Working with a CPA can help you determine the best timing and approach for major purchases, allowing you to capture these tax benefits and reduce your taxable income effectively.
- Business Travel Expenses
If you travel for business, the IRS allows you to deduct several related expenses, such as airfare, lodging, car rentals, and 50% of meal costs. Travel expenses must be both ordinary and necessary, and documentation is crucial to comply with IRS requirements.
Only the expenses directly related to business activities are deductible. For example, if you attend a conference in another city, your travel, lodging, and meal expenses for the conference dates would be deductible, but any personal days or sightseeing expenses would not. To qualify for the deduction, keep records of travel dates, destinations, and the business purpose of each trip.
Plan Now to Maximize Tax Savings
Taking advantage of these essential tax deductions can lower your taxable income and free up resources to reinvest in your business. Because each deduction has specific eligibility requirements, discussing these options with your CPA helps ensure compliance and maximum benefit. Year-end tax planning can simplify the tax filing process, making it easier to capture these savings.
If you need tailored support with tax planning, our team of experienced CPAs is ready to assist. Reach out to us today, and we’ll help you strategize, prepare, and optimize your tax deductions, so your business can make the most of every tax break available.
