This can lead to significant tax savings for small business owners. Here are some key points to consider when investing in a business building:
- Depreciation Deduction: When you invest in a business building, you can take advantage of depreciation deductions. This means you can deduct a portion of the building’s value each year as a business expense. This can help lower your taxable income and reduce your tax liability.
- Section 179 Deduction: The Section 179 deduction allows you to deduct the full cost of qualifying business property, including business buildings, in the year it is placed in service. This can provide immediate tax savings and help improve your cash flow.
- Interest Deduction: If you finance the purchase of a business building with a loan, you may be able to deduct the interest payments as a business expense. This can further reduce your taxable income and lower your tax bill.
- Capital Gains Tax Benefits: When you eventually sell a business building, any increase in value may be subject to capital gains tax. However, if you hold the building for a certain period of time, you may be eligible for favorable capital gains tax rates, reducing the amount of tax you owe on the sale.
- Tax-deferred Exchanges: If you decide to sell a business building and reinvest the proceeds in another similar property, you may be able to defer paying capital gains tax through a 1031 exchange. This can help you maximize your investment returns and avoid immediate tax liabilities.
Overall, investing in a business building can be a smart tax strategy for small business owners looking to save on their tax bills. It’s important to consult with a tax professional or financial advisor to fully understand the tax implications of investing in a business building and ensure you are taking full advantage of all available tax benefits.
One common strategy used by business owners to lower taxable income is to deduct depreciation related to a building that doesn’t actually exist. This "phantom expense" allows for a reduction in taxable income, ultimately saving money on taxes. For S-corporations, it’s recommended to personally own the building and lease it to the business to take advantage of this deduction.
When purchasing business property such as a warehouse, office building, or residential rental property, considering a cost segregation analysis can be beneficial. This detailed study breaks down the cost of building parts and fixtures, assigning a depreciable life of five, seven, or fifteen years to different components. By separating the cost of shorter-lived property from the building itself, additional depreciation deductions can be claimed on individual parts of the property, such as equipment and fixtures like HVAC systems.
8. Deduct Fixed Assets Using Bonus Depreciation or Section 179
Bonus depreciation and section 179 expense are tax rules that allow for the immediate deduction of the entire cost of fixed asset purchases instead of spreading out depreciation over time. While bonus depreciation was previously allowed on 100% of qualifying purchases, it is now limited to 60% in 2024 and 40% in 2025. By combining section 179 and bonus depreciation, business owners can maximize their deduction for fixed asset purchases.
9. Screen Job Candidates for the Work Opportunity Tax Credit
The Work Opportunity Tax Credit (WOTC) is available to businesses that hire workers from specific targeted groups identified by state workforce agencies. By hiring and paying workers from these groups, businesses can qualify for a tax credit worth up to 40% of the qualified first-year pay for employees who worked at least 400 hours. Completing IRS Form 8850 before making a job offer is necessary to take advantage of this tax credit.
10. Claim the Deduction on Home Office Expenses
Small business owners who operate a qualified home office can deduct the costs associated with running their home office. This deduction includes expenses such as real estate taxes, mortgage interest, rent, utilities, insurance, depreciation, maintenance, and repairs. Alternatively, a standard rate of $5 per square foot for up to 300 square feet can be deducted without tracking actual expenses.
11. Deduct Your Mileage Expenses
Business owners who use their personal vehicle for business purposes can deduct mileage expenses at the standard rate of 67 cents per mile in 2024 (70 cents per mile in 2025). Keeping track of mileage is made easier with mileage tracking apps that automatically record trips and categorize them as business or personal. Deducting mileage expenses can lead to significant tax savings.
12. Convert Your Sole Proprietorship to an S-corp
Converting a sole proprietorship to an S-corporation can result in payroll tax savings for business owners. In a sole proprietorship, all business income is subject to self-employment tax and income tax. However, in an S-corp, only W-2 wages and salary paid to the owner are subject to payroll taxes, while the remaining business income is only subject to income tax. Timing the conversion to an S-corp, especially when hiring employees, can maximize tax advantages for business owners.
When it comes to saving on payroll taxes as an S-corp, there are several strategies that business owners can implement to maximize their income while minimizing tax liabilities. Prior to having employees, the income of the business is usually attributed to the owner’s labor. In such cases, the IRS may argue that all income should be paid in wages, resulting in no savings on payroll taxes. However, by following these bonus tips, S-corp owners can find ways to save on payroll taxes:
1. Minimize Your Compensation as an S-corp Shareholder
While it’s important to pay yourself a reasonable salary as a shareholder/employee, finding ways to minimize compensation and withdraw cash through other means can help save on payroll taxes. Just be sure to justify the salary you pay yourself based on market compensation for similar roles.
2. Loan Your S-corp Money
Consider loaning money to your business instead of investing it as equity capital. The corporation can repay the loan with interest, which is tax-deductible for the corporation and taxable to you without incurring payroll taxes.
3. Lease Real Property to Your S-corp
Rather than owning real estate within the corporation, lease it to your S-corp at a profit. This allows you to withdraw rent without paying payroll taxes. Ensure that any contracts are reasonable in dollar amounts.
4. Take a Shareholder Distribution From Your S-corp
Taking a shareholder distribution is a simple way to withdraw money without incurring payroll taxes. However, be mindful of excessive distributions that could raise questions from the IRS about your compensation adequacy.
By implementing these strategies, S-corp owners can navigate the complexities of payroll taxes and maximize their income while minimizing tax liabilities. It’s essential to consult with a tax professional to ensure compliance with IRS regulations and to optimize tax-saving opportunities.
13. Use the Tax-loss Harvesting Strategy
Selling investments with unrealized losses can help offset capital gains and other types of income, reducing tax liabilities. However, be mindful of wash sale rules that disallow losses if substantially identical assets are repurchased within 30 days.
14. Make Estimated Tax Payments
Small business owners, including S-corp owners, must make estimated tax payments on their business income to avoid underpayment penalties. It’s crucial to estimate income tax and self-employment tax accurately and submit quarterly payments to stay compliant with tax obligations.
15. Use W-2 Withholding to Avoid Underpayment Penalties
For small business owners with additional income from a 9-5 job, utilizing W-2 withholding can help offset tax liabilities and avoid underpayment penalties. By planning estimates based on total tax obligations and projected withholding, business owners can stay on top of their tax responsibilities.
Overall, understanding the nuances of payroll taxes and implementing strategic measures can help S-corp owners save on taxes and optimize their financial outcomes. By working with tax professionals and staying informed about tax regulations, business owners can make informed decisions to maximize their income and minimize tax liabilities.
Individual estimated taxes are expected to be paid by the IRS as income is earned and remitted in quarterly installments. This can become complex when unexpected income is received towards the end of the year. The IRS treats income taxes from W-2 compensation as paid evenly throughout the year, regardless of when it is actually withheld. This allows taxpayers to adjust their withholding at year-end to accommodate for any additional income received late in the year.
For example, a taxpayer who earns both self-employment income and W-2 compensation may choose to have a year-end bonus withheld and remitted to the IRS for taxes to cover the extra income from their side business.
If you’re a small business owner looking to minimize taxes, the key is to maximize deductions by keeping accurate records of all expenses. This will help you identify which deductions apply to your business and reduce your taxable income.
LLC owners can consider converting to an S-corp to eliminate self-employment taxes, as LLC earnings are subject to both self-employment and income taxes. This can result in significant tax savings for owners.
When it comes to saving for taxes as a small business owner, the amount you should set aside depends on your income for the year. To avoid federal underpayment penalties, aim to pay at least 100% of the prior year’s tax (110% if your income is over $150,000). Some tax professionals recommend setting aside 25% to 40% of your income for taxes, including any W-2 withholding.
In conclusion, good tax planning for small business owners starts with organization and accurate record-keeping. Consider hiring a tax professional to help you navigate the various deductions available to your business and maximize your tax savings. By staying on top of your finances and seeking expert advice, you can effectively minimize your tax liability and keep more of your hard-earned money.