Top Tax Strategies for Small Business Owners in 2022
Staying ahead of your tax obligations can make a significant difference in your financial health as a small business owner. The IRS offers various tax-saving opportunities that can reduce your tax liability if approached correctly. Here, we outline some key strategies to help you maximize savings.
Cash-Basis Taxpayer Strategies
The IRS provides a safe-harbor rule for cash-basis taxpayers, allowing you to prepay and deduct qualifying expenses up to 12 months in advance without challenge or adjustment. However, prepayments made in 2022 cannot extend into 2024. Qualifying expenses include lease payments on business vehicles, rent payments on offices and machinery, and business and malpractice insurance premiums.
For accrual-basis taxpayers, expenses must be recorded as accrued, meaning you cannot prepay expenses. Instead, you can place vendor orders and make purchases on credit, deducting them in the current tax year even if paid later.
Maximizing Your Home Office Deduction
If you use a home office for business, you may be eligible to deduct a portion of your home expenses. Be prepared to document the size of the office, its use, and its proportion to the total home area. S Corporations can also claim this deduction if properly structured in advance.
Taking Advantage of Mileage Deductions
The IRS allows a standard mileage deduction: $0.585 per mile for the first half of 2022 and $0.625 for the second half. While it may seem modest, it can add up significantly, especially if you qualify for the home office deduction, allowing your business trips to start and end at your home.
Choosing the Right Business Entity
Selecting the right entity—Sole Proprietorship, S Corporation, or C Corporation—can impact your tax liability. Each entity type has advantages and disadvantages, so it’s essential to evaluate your choice regularly to align with your financial goals.
Hiring Family Members
Hiring your children can offer tax benefits. Sole proprietors can save on FICA and income taxes if their wages are under the standard deduction amount ($12,950). S Corporations also offer income-shifting advantages, though FICA taxes apply.
Leveraging ROTH IRA Conversions
A low-income year is an ideal time to convert a Traditional IRA to a ROTH IRA, as the conversion tax will be minimized. Any post-conversion earnings grow tax-free, providing long-term financial benefits.
Selling Your Principal Residence
If you have lived in your primary residence for at least 2 out of the last 5 years, you may sell the home and exclude up to $500,000 (married) or $250,000 (single) of capital gain from taxable income. This exclusion can be used every two years.
Maximizing Retirement and HSA Contributions
Contributing the maximum to your retirement accounts before the year ends can help lower your taxable income. Additionally, maxing out your HSA contributions if you have a high-deductible health plan allows you to save for medical expenses with tax advantages.
Schedule a Tax Planning Consultation
Many of these strategies require proper documentation and consideration of your unique tax situation. To ensure compliance and maximize your savings, schedule a Consultation with us today or fill out our prospect inquiry form.