How To Reduce Tax Liability for Small Businesses

When operating a small business, the margins between success and decline are often razor-thin, which means small business owners must use every tool available to them, including tax advantages. Below, we’ll discuss some simple ways small business owners can reduce their tax liability by investing in themselves, their employees, and more.

Save for Retirement

If you’re a self-employed small business owner, saving for retirement has many tax benefits. Besides the natural benefits of long-term planning and investment, there are many retirement savings options with tax reductions, like establishing a Solo 401(k) and Saver’s Credit.

A Solo 401(k) allows individuals to save 100 percent of their income as an employee contribution toward retirement. A Saver’s Credit also allows individuals to save up to 1,000 dollars (2,000 dollars if filing married jointly) to contribute to a retirement account. It pays now to save for the future!

Utilize the Opportunity Zone Reinvestment

The Opportunity Zone Reinvestment tax advantage is for small business owners selling their businesses and is a great way to avoid common tax pitfalls when selling a private practice. The Opportunity Zone Reinvestment allows business owners to defer their capital gains taxes from the profits earned from the sale by investing it into another business, property, or fund within 180 days.

The capital gains tax is the most significant tax hit for small business owners selling their business, especially when it’s a short-term capital gains scenario instead of a long-term. The Opportunity Zone Reinvestment allows owners to reinvest those funds immediately, tax-free. But the tax advantage is only available until December 31, 2026, so small business owners must act fast to take advantage.

Deduct Car Expenses

Those who own a small business may not realize they can save on their taxes by deducting their car expenses. If a small business owner uses their car for business purposes or owns a company vehicle, they can reduce any expenses related to operating and maintaining the vehicle.

Small businesses can reduce their tax liability by deducting per mile via the standard mileage rate, which offers around $0.60 per mile (varies by time of year), or through the Actual Expenses route. The Actual Expenses deduction is better for some as it allows the deduction of all gas, oil, maintenance, repairs, registration fees, and other expenses related to the vehicle.

Invest in Employees

Another smart way business owners can improve their small businesses while reducing their tax exposure is to invest more in their employees. Most of the investments in employees, like salaries, bonuses, and other compensation, are tax deductible for business owners.

Contributions to employee retirement accounts via matching or safe harbor contributions are also tax deductible. Not only does this allow small business owners to invest in their business tax-free, but it helps attract employees and keep morale high!

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