Tax Planning Strategies for Small Businesses

If yours is like most small businesses, you run a tight budget and work hard to maximize profits and mitigate losses. However, too often smaller company owners aren’t aware of how tax planning and management – in conjunction with budget controls – can impact their bottom line, both negatively and positively. Including tax planning and strategic oversight into a small business budget is both prudent and an excellent business strategy.

Tax Planning Avoids Unnecessary Losses and Overpayments

As the owner of a small company, you’re an expert on your core services. You’re probably not, also, a tax expert. Regardless of the size of the enterprise, most company owners aren’t fully educated on how the business tax system is set up; its codes, rules, and regulations appear to be explicitly designed to inhibit a non-accounting professional from wading into them too deeply.  

Accordingly, obtaining input from a well-versed accountant on tax planning strategies for small businesses is foundational to successfully running your organization. They can explain the subtleties of incorporating taxation management into the day-to-day financial oversight of the company so that you can stay on top of your tax position as easily and comprehensively as you manage your expense accounts.  

Different Categories for Different Classes of Assets

In general, there are three tax planning strategies commonly used by small businesses to both leverage and protect their existing assets: 

Capital Purchase Planning

Capital assets – physical components such as buildings, equipment, vehicles, etc. – are treated differently tax-wise than revenues. In most cases, these types of purchases are large, often costing thousands of dollars. Small business owners must be careful about making such a purchase and how it will impact the enterprise’s overall value.

Typically, organizations add capital assets when they are growing; they need bigger, better equipment, larger facilities, and extra production lines to handle all those new orders. Also typically, capital assets are considered ‘permanent and fixed,’ meaning that they’re not consumable (like office supplies) or intended to be discarded after only a short time. Consequently, their purchase is not taxed like consumables, which are usually considered ‘operating costs’ and are deducted as expenses in the period in which they are incurred. 

Instead, the tax code allows companies to spread the purchase cost – and gradually depreciate the value – of their registered capital assets (those marked as such on the company’s balance sheet) over their useful life, which is typically more than one year. Spreading the expense of the depreciating asset over time also offsets revenues accumulated over time, so the company has a built-in capital expense capable of offsetting future revenues for years after the initial capital investment was made. 

Cash Flow Planning  

Cash is considered a receivable (revenue) as it comes in, and a payable (expense) as it goes out. Typically, expenses (the cost of materials, labor, etc.) are deducted from the revenues (the price consumers pay for the final product), and taxes are paid on the resulting net income. Strategizing how to minimize that tax exposure in any corporate transaction can result in keeping more revenues in-house for future use. Organizations that maximize the value and timing of deductions have more money on hand to use for business purposes, including purchasing capital assets and expanding staff wages and size, just to name two. An accountant can help you streamline your revenue-to-expense strategies to limit the taxes you pay on your company’s ongoing activities.  

Retirement Planning

Retirement planning for the small business owner encompasses investments made for the employees’ benefit as well as protecting the company owner’s retirement plans. There are several strategies available for this category of tax management, each of which offers a unique type of tax advantage.  

  • Tax Management For <100 Employees: Organizations with 100 or fewer workers typically fund a SIMPLE-IRA – a Savings Incentive Match for Employees – for each employee. This savings account allows the worker to make tax-deductible contributions to their IRA while also facilitating an employer contribution of up to 3% of the employee’s compensation or a flat 2% of that amount. In 2022, workers under 50 years old could contribute up to $14,000; those over 50 could contribute an additional $3,000. Sending these funds to a retirement account reduces the overall tax exposure of the depositor.

  • Tax Management for the Sole Proprietor – the SEP-IRA: These Simplified Employee Pension retirement accounts are ideal for sole proprietors because they allow workers to contribute up to 20% of net self-employment income, up to $61,000 in 2022. Companies with workers can use them too, but must follow their precise rules:
    • The contributions are made by the employer (not the employee).
    • The company must also contribute to the employee’s account the exact amount that the owner contributes to their own account. 

Strategizing retirement protection practices as tax events allows business owners to save for their workers’ future while reducing the corporation’s overall tax exposure. 

There’s a lot to do when running a small business. Company owners must track every little detail from every element of their organization: inventory, staff, supplies, insurance – the list goes on. Careful monitoring of tax-influencing expense and revenue accounts is also critical for overall corporate well-being. At Chesapeake Growth Network, we offer tax planning services for enterprises of all sizes. We can help your small business reduce its tax exposure through strategic planning of all company activities. Call us today!

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