4 Business Tax Planning Ideas
The best thing you can do is think about taxes before the year ends. Most people wait until the tax filing deadline before asking how to reduce their income taxes. Unfortunately, once 2022 ends, there’s very little you can do to minimize your taxes for 2022.
To start your tax planning, you should review your income, deductions, and withholdings before the year ends. This means you need to get your bookkeeping caught up! You should use a software program, such as QuickBooks, Quicken Home, and Business, or spreadsheets to keep track of your income and expenses for your business.
Once your bookkeeping is caught up… do you expect your home business to have a profit or a loss this year?
If you have a profit, here are some tax planning tips to help minimize your home business taxes this year:
1. Defer your income. If you have a home-based business and it looks like you’ll have a good profit this year, consider invoicing your clients in January instead of December to defer the income to next year. Or wait until the end of December to send invoices. In January, any money you receive will go on your 2023 tax return, not 2022.
2. Accelerate expenses. Do you need to purchase any inventory? What about supplies? Does your computer need to be replaced? If you’ve got a profit for 2022, consider purchasing inventory, supplies, or other items that will need to be replaced soon this year to reduce your taxable profit.
In addition, if you itemize your tax deductions, make sure you pay all mortgage payments, property tax, medical expenses, etc., this year, even if they aren’t due ’till next year, to help increase your tax deductions for this year.
3. Contribute the maximum amount to retirement plans. As a home-based business owner, you have several retirement plans to choose from. You can set up a traditional IRA, a SEP IRA, a Simple IRA, or even a 401K. The maximum contribution amounts vary based on the retirement plan, but these plans allow contributions from $6,000 up to $61,000 per year. Contributing to a retirement plan is a great way to maximize your retirement savings and minimize your taxes at the same time.
4. Give to charity. Although charitable donations don’t reduce your business income, they reduce your taxable income by itemizing your deductions. Gifts of cash or goods are a great way to help reduce your tax bill this year.
On the flip side, if you expect a larger profit next year or expect to jump into a higher tax bracket next year, it’s best to report as much income this year and defer as many expenses as possible ’till next year.
Either way, year-end tax planning can help minimize your taxes. But you have to make it a point to review your taxes before the year ends. Once 2022 is gone, so are your tax planning opportunities for 2022.
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