Tax season has arrived, along with the awful fear of having to pay too much in taxes (or the joy of knowing you'll get your taxes back).
The Tax Cuts and Jobs Act of 2017 significantly reduced the corporate income tax rate from 35% to a flat rate of 21% and lowered the personal income tax bracket threshold for salaried workers at all levels.
Many of these tax cuts expire in 2025, but unlike individual income tax brackets, which are scheduled to return to pre-TCJA tax rates on January 1, 2026, corporate tax cuts have been made permanent for resident corporations. 99.9% of all US businesses are small. For many businesses (there are 32.5 million), the expiration of the TCJA will be a challenge for many business owners.
apply Kiplinger's personal finance
Become a smarter, more informed investor.
Up to 74% off
Sign up for Kiplinger's free e-newsletter
Profit and prosper with the best expert advice on investing, taxes, retirement, personal finance and more straight to your email.
Profit and prosper with the best expert advice straight to your email.
Whether you're a small business owner or a sole proprietor paying self-employment taxes, minimizing your tax burden is everyone's goal. legally.
How to minimize your tax burden
When trying to maximize investment returns, it's common to fear increased taxes. ROI is a performance ratio that evaluates the efficiency of business investment relative to net income.
Hardy Desai, founder of Supple, said: “The higher the net income, the higher the income tax base. In general, it can be said that the (taxable) net income and the amount of tax paid are directly proportional to each other.”
However, the U.S. tax code includes tax credits, credits, and credits that small business owners can take advantage of to legally minimize their tax liability while maximizing their ROI.
1. Provide and set up a 401(k).
From a tax reduction and tax deduction standpoint, you can't rule out the option of using defined contribution plans like 401(k)s.
It's a little known fact that for business owners with employees, providing a 401(k) to employees is more than just an expense. Employer contributions are also considered part of the expense and can be deducted from taxable income to reduce the tax burden. Employee welfare.
Brooke Webber, Head of Marketing at Ninja Patches, added: “The good news about business owners offering a 401(k) is that the deductible expenses associated with contributions are not limited to a portion of the contribution. Administration of the contribution plan, such as administrator, bookkeeper, and consultant fees. Expenses incurred are also deductible expenses and can be included to lower your taxable income.
Self-employed individuals can also set up a solo 401(k) plan online or through a traditional broker or financial services firm to prepare for retirement and take advantage of potential tax savings in the process.
From a tax savings perspective, the question with 401(k)s is “when.” Now is the perfect time to get taxed on these retirement contributions. There are two types of 401(k)s: traditional and Roth, and traditional 401(k)s receive pre-tax contributions, while Roth 401(k) contributions are after-tax. In other words, there is no tax. Later when you withdraw money.
In general, many experts recommend choosing a Roth 401(k) or Roth conversion, which is understandable. Because it's better to pay taxes now and enjoy tax-free withdrawals later, especially if you're likely to be in a higher income bracket in retirement. . An across-the-board tax increase could also affect how your future withdrawals are taxed and how much you pay.
“Given tax increases and regulatory volatility, we decided to offer a Roth option to our employees that allows them to withdraw their taxes later with peace of mind,” said Michael Maximoff, co-founder and managing partner at Belkins. ”.
However, from the perspective of maximizing ROI and minimizing tax burden; now, with a traditional 401(k), you can reduce the taxes you pay each year you contribute to the plan by subtracting your pre-tax 401(k) from your taxable income, but withdrawals are subject to that year's applicable taxes. It is treated as ordinary income that is taxed separately. .
Let's say you earn $100,000 a year and contribute $20,000 of that income to a traditional 401(k) plan. This means that you will only be taxed on $80,000 per year instead of $100,000.
Note: In 2024, individuals will be able to: Contribute up to $23,000 to your 401(k)This is an increase of $500 from the 2023 cap of $22,500.
The real dilemma of which 401(k) plan to choose comes down to when do you want to be taxed: today or later? It's also important to consider tax effects and economic changes when deferring taxes on defined contribution plans like 401(k)s.
2. Take advantage of tax credits.
Tax credits lower your tax base, but tax credits are subtracted from the taxes you ultimately owe.
The Inflation Act of 2022 creates new and extended tax credits and deductions for individuals, businesses, tax-exempt organizations, and government entities.
These tax credits include:
- clean car tax credit. Up to a $7,500 tax credit is available for eligible electric vehicles (EVs) or fuel cell vehicles (FCVs), depending on terms of use and adjusted gross income requirements.
- home energy tax credit. Up to $1,200 tax credit for eligible improvements. Residential structure. You are not allowed to claim these tax credits for structures that are not used for residential purposes. Residential Clean Energy Credits are also available for those using renewable energy sources, with up to 30% of the cost of improvements available without limit.
- Work Opportunity Tax Credit. A tax credit is available for businesses that employ individuals in eligible groups up to the first and second year of payroll.
- Research activity credits. Tax credits are available to companies that use research and development costs to improve product improvements, efficiency, and performance that contribute to economic benefits.
Morgan Taylor, Co-Founder of Jolly SEO says: We believe the IRS is taking the right step in helping targeted groups by providing tax credit benefits to businesses that employ them, which is a win-win. It's the situation. ”
As outlined on the IRS website, more tax credits are available to sole proprietorships and business owners.
3. Make a charitable donation.
One of the most popular tax minimization strategies for businesses is charitable giving. Apart from social contributions, a business owner can claim up to 60% of her adjusted gross income (AGI) until 2025 for charitable cash donations to eligible organizations. When donating real estate, the fair market value of the property is used as the basis.
Taxpayers with a charitable contribution deduction must itemize the deduction on Schedule A of IRS Form 1040.
Jerry Han, CMO of Prize Level, said: “Tax benefits for charities benefit both the donor and the donee. The donee receives the funds and the giver can benefit from the tax deduction. However, like the TCJA, Some tax regulations penalize the benefits of charitable deductions for donors, preventing them from choosing itemized deductions and instead choosing the standard deduction.”
Is it illegal to minimize your tax burden?
Many people have asked me if minimizing your tax burden is illegal, but it is not.
This may stem from the misunderstanding that tax avoidance and tax evasion are similar in concept but are implemented differently.
conceptually, Tax avoidance and tax evasion have the same objective of minimizing taxes. Both have overlapping ways to lower taxes. What initially appears to be tax evasion can appear as tax evasion if misused.
For example, certain research and development (R&D) expenses, typically 6% to 8% of a company's R&D expenses, are tax deductible, which can reduce income tax liability. However, inflating tax credits by manipulating documents to qualify for research and development tax credits to reduce income tax payments is considered tax evasion.
Sean Plummer, CEO of The Annuity Expert and contributor to Kiplinger Building Wealth, says, “The fine line between tax evasion and tax evasion is the intention to mislead regulators and manipulate data to lower taxes.'' Tax evasion or tax evasion is a criminal offense punishable by up to five years in prison or a $500,000 fine.”
relevant content
This article was written by and represents the views of our contributing advisors and not of Kiplinger's editorial staff. To check your advisor's records, SEC or together finra.
