They say that the only true certainties in life are death and taxes. The latter can be especially cumbersome for small business owners, whose profit margins and cash flow can be precarious even before Uncle Sam’s share is adduced.
Fortunately, there are plenty of tax advantages that small business owners can claim if only they know how. Learning about these tax benefits can be an important way to keep your company in a strong financial position, and to lay a foundation for long-term growth.
Start by Choosing the Right Legal Structure
First things first: When you start a business, you’re faced with the all-important decision of how you’ll structure it from a legal perspective. The structure you choose can have a major impact on your reporting relationship with the IRS.
While there’s not necessarily one correct answer across the board, a majority of small business owners will benefit from the Limited Liability Company (LLC) structure. When you register your small business as an LLC, you establish it as its own legal entity, meaning you can keep business assets and liabilities separate from personal assets and liabilities. This provides personal liability protections to keep you and your business partners safe.
Tax Benefits for LLCs
Registering your small business as an LLC can also yield some significant tax advantages.
The primary benefit is pass-through taxation, which is the default position for all LLCs. With pass-through taxation you simply have to declare any business profits or losses on your personal tax return; if you declare profits, you pay at your normal tax rate. You don’t have to file a separate return for the business, which means you can avoid the double taxation that Corporations face.
With that said, LLCs can also opt into corporate taxation if they determine for any reason that it would be advantageous to do so.
Registering for LLC Benefits
To take advantage of these LLC tax benefits, there are a few steps required. Here’s a quick primer for small business owners.
- The first step is choosing the state where you want to register, which will usually just be the state where your small business is located. The state you choose may have an impact on the rest of the process; for example, if your company is in Orlando, you’ll want to specifically look into the best way to start an LLC in Florida.
- LLCs also have to have a Registered Agent, someone who can receive legal correspondence on your business’s behalf. A Registered Agent can be more or less anyone with a physical mailing address in the state where you’re registering.
- To formally register with the state, you have to file a document called Articles of Organization, and also pay your state’s filing fee. This can be anywhere from $15 to $300, just depending on the state you’re in.
By following these steps, you’ll be ready to take advantage of all the tax benefits that the LLC structure can provide.
Other Tax Benefits for Small Business Owners
Of course, registering as an LLC is just the first of several steps you can take to claim tax advantages for your small business. Consider a few other examples of small business tax benefits:
Section 179 Deductions
The Section 179 deduction is essential for any business owner who invests in things like business equipment, machinery, and even software. It allows you to claim the full purchase price of the equipment you’ve purchased within the calendar year, which can go a long way toward offsetting some of those expenditures. Asset financing can be an excellent way to acquire such equipment, allowing you to spread the cost over time while benefiting from immediate tax deductions.
Qualified Business Income Deductions
Another important benefit is the QBI, which is available to any pass-through entity; again, this includes the LLC, but it also includes Sole Proprietorships and Partnerships, if that’s how you choose to structure your company. The QBI allows you to deduct 20 percent of qualified business income, reducing the overall tax burden of your small business.
Home Office Deductions
Of course, for small business owners who work from their homes, there are some significant tax advantages to be aware of. For whatever portion of your home is used exclusively for business, you can deduct things like utility costs, insurance, in some cases even home maintenance and repairs.
Retirement Plan Contributions
For small business owners, it’s critical to plan for the future… and that means investing in a retirement account. Good news: Contributions to retirement plans such as a SEP IRA, SIMPLE IRA, or 401(k) are tax-deductible. In other words, you can reap the twin benefits of reducing taxable income and putting away a retirement nest egg.
Employee Benefit Deductions
Another important tax benefit is the employee benefit deduction, which lets you deduct costs associated with providing health insurance, retirement contributions, and education assistance, among other employee benefits. This one is a must for small businesses that are starting to expand their payroll.
Health Insurance Premiums
Speaking of insurance and other benefits, note that small business owners can deduct the cost of health insurance premiums for themselves, their spouse, and their dependents. This can be a smart way to offset the often-high costs associated with acquiring medical benefits.
Bonus Depreciation
As of 2024, small business owners can depreciate 80 percent of the cost of qualified property in the first year. Note that this applies to both new and used equipment, but it must be new to the business.
Take Advantage of Core Small Business Tax Benefits
When you’re operating a small business, it’s important to do anything possible to keep your cash flow and profit margins positive. One way of accomplishing that is by reducing your taxable income. These tax benefits, starting with LLC formation, can all set your small business in the right direction. With specific questions, reach out to a tax pro or a business coach in your area.
