If you’re a business owner, then tax season can bring on a whole new set of tax-related challenges. Fortunately, there are a number of valuable tax filing strategies to maximize credits and deductions that can benefit a business owner.
Determining what federal tax forms you need to file will depend on the form of your business.Each form of business—sole proprietorship, partnership, corporation, S corporation, and limited liability company (LLC)—has specific sets of filing rules.When it comes to state taxes, your requirements will also depend on the legal structure of your business.
Many small business owners find comfort in working with a CPA or qualified tax professional.If you feel comfortable enough to prepare your taxes on your own, there are several great filing strategies to maximize credits and deductions that you'll want to be aware of.
- You can take a deduction for providing certain types of child care or health care for your employees.
- You may be able to take a deduction for certain employee salaries.
- You can take a deduction for many necessary business expenses, including travel and purchasing business property.
Claim the Health Care Tax Credit
You’ll want to speak to your CPA to make sure you’re eligible, but the health care tax credit can produce some savings. This credit benefits employers with fewer than 25 full-time employees that pay an average salary of less than $56,000 per year and pay at least half of employee health insurance premiums.
Note
If you cover at least 50% of your employees' health insurance premiums and meet other qualifications, the Small Business Health Care Tax Credit could provide a tax credit of up to 50% of your related costs. See the government's guide to Small Business Health Options Program (SHOP) and other resources for details.
Deduct Certain Property
You can deduct business property from your taxes by taking the 179 deduction and filing Form 4562. You can deduct up to $1,080,000 of eligible business property for tax year 2022.
You can only deduct the full amount in the year your business began using the property, so it works well for those who have recently moved, or for business owners who acquired new property used for transportation, manufacturing, business, or research.
Note
While tax deductions and tax credits both reduce how much tax you owe, tax credits are the more valuable of the two. That's because they reduce the amount of tax you owe, dollar-for-dollar, after your tax liability has been calculated. Deductions, on the other hand, reduce the amount of income used to determine what you owe, and their effect is less pronounced than a credit (generally by the same percentage of the tax bracket you land in).
Deduct Charitable Contributions
Sole proprietors, partnerships, LLCs, and S-corporations can't deduct charitable contributions as a business expense, but a business owner or shareholder can claim any contributions made by the business as an itemized deduction on Schedule A of Form 1040.
Note
Even taxpayers who do not itemize can claim a deduction for cash donations to qualified charitable organizations. You can claim a deduction of up to $300 per taxpayer for charitable contributions made by cash or check during the tax year.
The Work Opportunity Tax Credit
The Work Opportunity Tax Credit is available for businesses who hire qualified members of certain groups, including veterans, SNAP and SSI recipients, and ex-felons. The credit amount can vary, but in general, you can receive a credit of up to 40% of the first $6,000 of qualified wages paid to a new hire from one of the specified groups. The employee would need to work at least 400 hours for your business in order for you to qualify for the credit.
Claim a Credit If Your Business Provides Child Care Expenses
If your business pays for your employees’ child care expenses, you can receive a tax credit. The credit is 25% of qualified child-care expenses paid and 10% of qualified child care resource and referral expenditures. For providing these services, your business can deduct no more than $150,000 from taxes.
Claim the Pension Plans Startup Cost Credit
If you’ve just started a retirement or pension plan for your employees, including a SEP, SIMPLE IRA, or 401(k) plan, you may be eligible for a credit. It’s worth up to $5,000 for the first three years of the plan to help small businesses recoup the costs of starting a plan.
Deduct Health Care Premiums
This applies for freelancers and self-employed individuals, not just any small business. If you have an individual health plan and pay premiums out-of-pocket, you can reduce your taxable income by the amount you paid in premiums. If you itemize your deductions, you can also deduct any medical expenses that are more than 7.5% of your adjusted gross income.
Miscellaneous Deductions
Out-of-town business travel, ATM card fees for your business, and even newspapers bought to conduct your business can be used as deductions. You'll want to look through all of your business expenses and possibly check with a tax professional to make sure you're taking full advantage of any tax deductions.
Frequently Asked Questions
How do small business owners reduce taxes?
There are many ways that small business owners can reduce taxes. They may be able to take deductions if they pay for certain types of health insurance, depreciate business property, hire certain qualified employees, and make sure to always record and then deduct the costs of other business expenses like travel.
How much does a small business owner have to make to file taxes?
If you're self-employed and made $400 or more, you have to file an income tax return, even if you won't actually have to pay any taxes that year.
