Business Tax

Many business owners focus heavily on increasing revenue, improving operations, and managing day-to-day expenses. But one area that often gets less attention than it deserves is proactive tax planning.

While paying taxes is a normal part of running a business, paying more than necessary due to missed opportunities, disorganized records, or lack of planning is something many business owners would prefer to avoid.

The good news is that effective tax reduction strategies do not have to be overly complicated. In many cases, smart habits and proactive decision-making can make a meaningful difference.

Keep Business and Personal Finances Separate

One of the simplest ways to create tax headaches is by mixing personal and business expenses.

When transactions are difficult to categorize, bookkeeping becomes less accurate, documentation may be harder to track down, and legitimate deductions can be overlooked. Maintaining separate accounts and clear financial records helps create a cleaner foundation for both tax preparation and business decision-making.

Good organization often saves time while reducing the risk of missed opportunities.

Maintain Accurate Expense Tracking

Small expenses can add up quickly over time, but only if they are properly documented.

Business owners sometimes underestimate how much deductible spending goes unrecorded simply because receipts are lost, transactions are not categorized correctly, or bookkeeping falls behind.

Consistent expense tracking helps improve accuracy and reduces the stress of trying to reconstruct financial activity later. It also creates better visibility into where the business is actually spending money.

Think Beyond Last-Minute Tax Preparation

Many businesses take a reactive approach to taxes, focusing only when filing becomes necessary.

The challenge with that approach is that some planning opportunities are easier to identify when decisions are being made throughout the normal course of business, not after the fact.

Major purchases, compensation decisions, equipment investments, and operational changes can all have tax implications. A proactive approach often creates more flexibility than waiting until paperwork is due.

Understand Entity Structure Matters

The way a business is structured can influence how income is taxed, how compensation is handled, and what planning opportunities may be available.

Many owners select a structure early in the life of the business and rarely revisit whether it still makes sense as the company grows or changes.

That does not mean every business should make changes, but it does mean periodic review can be worthwhile to ensure the structure still aligns with current operations and goals.

Avoid Overlooking Home Office or Vehicle Use Considerations

Some business owners assume certain deductions do not apply to them, while others make assumptions without understanding documentation requirements.

Whether a business operates from a dedicated workspace, involves regular vehicle use, or includes other common operational expenses, accurate recordkeeping and proper guidance can help determine what may be appropriate to claim.

The key is consistency and documentation.

Make Tax Planning Part of Financial Planning

Tax reduction is often most effective when it is treated as part of broader financial management rather than as a separate once-in-a-while exercise.

Better bookkeeping, stronger reporting, organized documentation, and regular financial review all support better tax outcomes while also improving overall business decision-making.

A proactive conversation with a trusted accounting advisor can help business owners identify strategies that align with their specific situation while helping them avoid costly oversights.

Taxes are an integral part of running a business, and they often represent a substantial portion of your expenses. However, there’s good news for businesses looking to reduce their tax burden and stimulate growth – business tax credits. These credits provide financial incentives for companies to invest in various activities, from research and development to promoting renewable energy. In this article, we’ll explore what business tax credits are, how they work, and how they can benefit your company.

What Are Business Tax Credits?

Business tax credits are financial incentives offered by governments at the federal, state, or local level to encourage businesses to engage in certain activities that benefit society, the environment, or the economy. These credits work by reducing a company’s tax liability, effectively lowering the amount of taxes they owe. They serve as a reward for businesses that invest in activities that align with the government’s policy objectives.

Types of Business Tax Credits

There are various types of business tax credits available, each with its own set of eligibility criteria and benefits. Here are some common types:

1. Research and Development (R&D) Tax Credit: This credit is designed to encourage businesses to invest in innovation and research activities. It can help offset the costs associated with developing new products, processes, or technologies.

2. Renewable Energy Tax Credits: These credits are intended to promote the use of renewable energy sources, such as solar, wind, and geothermal energy. They can significantly reduce the cost of investing in clean energy initiatives.

3. Investment Tax Credits: These credits reward businesses for investing in specific projects or assets that promote economic growth or job creation. They are often used to stimulate investment in economically distressed areas.

4. Low-Income Housing Tax Credit: Aimed at promoting the development of affordable housing, this credit provides incentives for businesses to invest in housing projects for low-income individuals and families.

5. Work Opportunity Tax Credit: This credit encourages the hiring of individuals from specific target groups, such as veterans and individuals with disabilities. It can offset a portion of the costs associated with employing these individuals.

Benefits of Business Tax Credits

Business tax credits offer numerous advantages for companies:

1. Reduced Tax Liability: The most apparent benefit is the reduction of your company’s tax liability. This translates into cost savings that can be reinvested in your business, used for expansion, or allocated to other vital activities.

2. Encouragement for Investment: Tax credits provide a financial incentive to invest in areas such as research and development, clean energy, or affordable housing. This encourages businesses to participate in activities that contribute positively to society and the economy.

3. Competitive Advantage: By taking advantage of available tax credits, your business can gain a competitive edge. This is especially relevant in industries where innovation, sustainability, and social responsibility play a significant role.

4. Stimulated Growth: Many tax credits are designed to spur economic growth, create jobs, and improve local communities. By participating in these initiatives, your business can be a catalyst for positive change.

How to Access Business Tax Credits

To access business tax credits, follow these steps:

1. Identify Eligibility: Determine which tax credits your business may be eligible for. Consult with a tax professional to assess your eligibility accurately.

2. Document Activities: Keep meticulous records of the activities that make you eligible for the tax credits. Proper documentation is essential to substantiate your claims.

3. File Accurate Tax Returns: Ensure your tax returns accurately reflect the credits you are claiming. Mistakes can lead to delays and audits.

4. Consult with Professionals: Tax professionals, accountants, and legal experts can help you navigate the complex world of tax credits, ensuring you maximize your benefits while staying compliant with tax laws.

Business tax credits offer a valuable opportunity for businesses to reduce their tax liabilities and invest in activities that promote growth, innovation, and social responsibility. By understanding the available credits and working with professionals to access them, your business can not only thrive financially but also contribute to positive change in your community and beyond.

What is Beneficial Ownership Information Reporting?

Beneficial Ownership Information (BOI) reporting is a federal requirement by the Corporate Transparency Act (CTA). BOI reports include information about all the company’s beneficial owners.

Who is considered a Beneficial Owner?

A beneficial owner is any individual who, directly or indirectly, exercises substantial control over a reporting company or owns or controls at least 25 percent of the company’s ownership interests.

What is the Corporate Transparency Act?

The Corporate Transparency Act (CTA) is a United States federal law that aims to increase transparency in corporate ownership. The law requires that individuals considered beneficial company owners in the U.S. provide the Financial Crimes Enforcement Network (FinCEN) with specific information.

For individuals, that includes:

• their full name
• date of birth
• current residential address
• a federally issued identification number from a driver’s license or passport

For companies, that includes:

• legal entity name or DBA name
• business address
• state jurisdiction of formation of registration
• IRS TIN

Any changes to the above reporting information must be updated with the FinCEN within 30 days of the change.

What is considered a Reporting Company?

Companies required to report a BOI are referred to as reporting companies. There are two types of reporting companies: domestic and foreign. They are defined as follows:

1. Domestic reporting companies are corporations, limited liability companies (LLC), and other entities created by filing a document with a secretary of state or similar office in the U.S.
2. Foreign reporting companies are entities (including corporations and LLCs) formed under a foreign country’s law and registered to do business in the U.S. by filing a document with a secretary of state or similar office.

There are 23 types of entities that are exempt from the reporting requirements. Those entities can be found on the FinCEN website.

What is the Reporting Process?

The reporting process takes place via an online portal on the FinCEN’s website. Filing begins January 1, 2024, with an initial filing window of one year (i.e., initial BOI reporting can be done from January 1, 2024, through January 1, 2025). The FinCEN will not accept BOI reporting before January 1, 2024. There is no fee for submitting this information.

New entities established after December 31, 2023, must report within 90 days of establishment.

Hefty civil ($500/day) and criminal penalties (up to $10,000) can be imposed on companies that fail to file a complete report.

To be sure that you and your firm comply with BOI reporting requirements, check with your trusted tax accountant or CPA.

Let’s talk about tax credits – what they are, how they differ from deductions, and which can benefit your small business.

What are tax credits?

A tax credit is a dollar-for-dollar reduction of one’s tax liability, reducing the amount of tax owed. So, a tax credit of $300 lowers your bill by $300.

Tax deductions work differently. Let’s see how tax credits and tax deductions differ.

How do tax credits differ from tax deductions?

Unlike tax credits, which are dollar-for-dollar reductions in taxes, tax deductions decrease one’s taxable income. That means only a percentage of each dollar deducted is taken off your income tax. The percentage depends on your tax bracket and the rate at which your income is taxed.

How do you know which tax credits apply to your business?

General business tax credits are calculated individually from a list of tax credits published by the IRS. Each one requires its own form. Once those are filled out, they are tallied. Once the general business tax credit for the year is determined, it is filed on Form 3800 with your tax return.

Now let’s discuss some tax credits that benefit small businesses.

What are some tax credits that benefit small businesses?

1. Family and Medical Leave Credit (FMLC)

Family and medical leave is taken when an employee must be away from work due to an event such as:

• the birth of a baby
• a severe illness of an immediate family member
• a serious health condition that prevents the employee from working

The tax credit for this type of leave is applicable when the employer:

• has a written policy in place stating they will provide family and medical leave.
• provides paid leave to employees for family or health-related reasons for at least two weeks in a given year.
• pays a minimum of half the employee’s earnings

The employee must have been on the payroll for at least one year for an employer to claim the credit, which is between 12.5 and 25 percent of the employee’s pay.

You will use IRS Form 8994, the Employer Credit for Paid Family and Medical Leave to claim this credit.

2. Child Care Credit

This credit is part of the general business credit. It may be claimed any time within three years from the due date of your return on either an original or amended return. The credit is 25 percent of the qualified childcare facility expenditures plus 10 percent of the qualified childcare resource and referral expenditures paid or incurred during the tax year, limited to $150,000 per tax year.

Qualified expenditures are:

• The cost of acquiring, building, or expanding a property to be used as part of a qualified childcare facility, is the depreciable (or amortizable) property and is not part of the principal residence of the business owner or any employee.
• Operating expenses of a qualified childcare facility of the taxpayer
• The expense paid to a qualified childcare facility that provides childcare to employees.

For this tax credit, fill out IRS Form 8882, Credit for Employer-Provided Child Care Facilities and Services.

3. Health Insurance Credit

Employers who pay health insurance premiums for employees can redeem a tax credit for up to 50 percent of those expenses. However, specific criteria must be met. For example, this credit only applies to companies with less than 25 full-time employees. The employer must pay at least half the employees’ health insurance premiums. Further, the average payroll cannot be more than $56,000 (as of 2022). Also, remember that your business must purchase health coverage through the Small Business Health Options (SHOP) program.

If your business meets these criteria (and all others required by the IRS), use Form 8941, Credit for Small Employer Health Insurance Premiums.

4. Employee Pension Plan Credit

The Employee Pension Plan Credit is worth up to $500, or 50 percent of your business startup costs. It can be claimed for the first three years of your plan. To qualify for this credit, your company must have fewer than 100 employees, each receiving a minimum of $5,000 in compensation. You can’t have had a 401(k) or other qualifying retirement plan for the previous three years. Lastly, you must plan to start a pension plan for your employees.

To claim this credit, use IRS Form 8881, Credit for Small Employer Pension Plan Startup Costs.

5. New Clean Vehicle Credit

This tax credit applies to plug-in electric vehicles (EV) or fuel cell vehicles (FCV). You could receive a credit of up to $7,500 for either of these types of cars. The Inflation Reduction Act of 2022 changed the rules for this credit for vehicles purchased from 2023 to 2032.

To qualify, the vehicle must be for your own use and not for resale and must be used in the United States. Further, your modified adjusted gross income (AGI) may not exceed $150,000. The type of vehicle the credit applies to can be found on the IRS website. (Note: battery and vehicle weight specifics and other qualifying criteria exist.)

To claim the credit, file Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit (Including Qualified Two-Wheeled Plug-in Electric Vehicles), with your tax return. You will need to provide your vehicle’s VIN.

6. Disabled Access Credit

You might be eligible for this credit if you spent money making your business more accessible to people with disabilities. To determine the official IRS definition of “accessible” which is broad, consult the instructions for IRS Form 8826. That is where you will find qualifying expenses.

The credit covers 50 percent of expenses up to $10,250 after the first $250. The maximum tax credit is $5,000. To claim this credit, use IRS Form 8826, Disabled Access Credit.

7. Work Opportunity Tax Credit (WOTC)

This credit is targeted at employers who hire individuals from specific groups, including (but not limited to):

• Veterans
• Ex-felons
• Summer youth employees
• SNAP recipients
• SSI recipients
• Long-term unemployment recipients

The WOTC is a one-time tax credit for newly hired individuals. To claim this credit, fill out IRS Form 8850, Pre-screening Notice, and Certification Request.

Of course, you can discuss these and many other tax credits that may benefit your small business with your qualified accountant or CPA.