7 Strategies to Reduce Your Business Taxes

By Mark Yatros

Do you feel confident when you file your business taxes? If you don’t, you’re in good company.

A study by American University tells us that 37 percent of small business owners feel anxious and confused about filing their taxes. Unfortunately, this can lead to missed deductions and a higher tax bill.

To ensure you don’t end up paying more tax than you should, you must pay attention to your taxes all year, not just in April. With proactive tax planning, you can identify ways to lower your tax bill before the year ends, which will help you take full advantage of deductions, credits, and other tax-saving strategies.

Below, you’ll discover seven actions you can take proactively to reduce your business tax bill.

1. Maximize tax deductions before year-end

As a small business owner, maximizing your tax deductions before the year ends is one of the easiest ways to lower your tax bill. If you’ve been considering upgrading your computer, purchasing new furniture, or stocking up on business essentials, make those purchases before December 31 to take advantage of the deduction this year.

One of the most powerful tools available to small business owners is Section 179 of the U.S. Tax Code. This allows businesses to deduct the total purchase price of qualifying equipment and software in the year it was purchased rather than spreading the deduction over the asset's useful life. This can provide significant tax savings.

The limit for Section 179 deductions varies each year, but for 2024, the deduction limit is up to $1.22 million for qualifying assets. Keep in mind that to qualify, the equipment must be purchased and put into use by December 31. This makes year-end a crucial time for planning, especially if you’re considering making more significant investments in your business.

Pro tip: Keep receipts for all your business-related purchases, especially if you plan to make some last-minute buys. Organized records make tax filing more manageable and help you claim all possible deductions.

2. Take advantage of the home office deduction

If you work from home, you may be eligible for the home office deduction, which can help reduce your taxable income. To qualify, your home office must be used exclusively and regularly for your business. This means the space should be dedicated solely to work and not used for personal activities. It could be a separate room or a designated area in your home.

There are two methods for calculating the home office deduction. The simplified method allows you to deduct $5 per square foot of your home office up to 300 square feet. This method is easy and requires less paperwork.

On the other hand, the regular method allows you to deduct actual expenses related to your home office, such as a percentage of your mortgage, rent, utilities, or insurance. To use the regular method, you'll need to keep detailed records of these expenses and calculate the percentage of your home used for business.

Pro tip: The home office deduction applies to both physical office spaces and home-based businesses. Whether you're a consultant working from a home office or running a small e-commerce business out of your garage, this deduction can help you save on taxes. But, just like everything else with your company, maintain accurate records and keep receipts to support your claim in case of an audit.

3. Review your retirement contributions

An excellent way to reduce your taxable income is to contribute to a retirement plan before the end of the year. If you haven’t already maxed out your contributions, now is the time to review your retirement options and make sure you’re taking full advantage of the available tax benefits. Plans like the SEP IRA (Simplified Employee Pension) and the Solo 401(k) offer significant tax-deferred growth and savings.

The contribution limits vary depending on the type of retirement plan you choose. For a SEP IRA, you can contribute up to 25% of your net earnings or a maximum of $69,000 for 2024, whichever is less. Meanwhile, with a Solo 401(k), you can contribute up to $23,000 as an employee plus an additional 25% of your compensation as an employer for a combined maximum contribution of $69,000. If you’re over 50, you can make catch-up contributions of an extra $7,500, further boosting your savings.

Not only do these contributions reduce your taxable income for the current year, but they also provide long-term financial security. Too often, small business owners put off contributing to a retirement plan. But if you can begin saving now, you’ll be much better off in the future, plus you’ll be taking advantage of tax breaks today.

Pro tip: If you’re unsure which retirement plan is best for you, my colleagues and I would be happy to help. We can advise you on strategies for maximizing contributions and tax savings while helping you meet the IRS contribution deadlines. You can schedule a free consultation here or by calling 269-218-2100.

4. Defer income and accelerate expenses

Another sound year-end tax strategy for small business owners is to defer income and accelerate expenses. By delaying income into next year and speeding up deductible expenses before December 31, you can lower your taxable income for this year, reducing the amount of tax you owe.

This strategy can be especially helpful for businesses that use the cash-based method of accounting, in which income is recognized when it is received, and expenses are recorded when they are paid.

For example, if you expect to receive a large payment in December, you could ask the client to delay the payment until January. This would push that income into the next tax year, lowering your taxable income for the current year. On the other hand, if you have upcoming business expenses, such as equipment purchases, office supplies, or marketing costs, consider paying for those before year-end so you can claim the deduction for this tax year.

While this strategy can offer immediate tax relief, it’s essential to carefully consider how it will affect your tax situation next year. Deferring too much income could result in higher taxable income next year, which could push you into a higher tax bracket. Also, if you accelerate too many expenses, you could have fewer deductions next year. A balanced approach is key to avoiding unwanted surprises when next year’s tax bill comes around.

Pro tip: Consider your overall financial goals when deferring income or accelerating expenses. It’s a good idea to consult a tax professional or financial advisor who can help you determine how much to defer or accelerate without negatively impacting your future tax obligations.

5. Claim available tax credits

In addition to deductions, as a small business owner, you can reduce your taxes by claiming tax credits. Unlike deductions, which lower your taxable income, credits reduce the tax you owe directly. Several tax credits are available for small businesses and claiming them can result in significant savings.

One popular option is the Research and Development (R&D) Credit. This credit is designed for businesses that invest in innovation and improvement, even if the research doesn't lead to a new product or service. If your company develops new processes, products, or software, this credit could help offset some of the costs associated with that development.

If you’re looking to reduce your environmental impact, the Energy-Efficient Property Credit may apply. If your business invests in energy-efficient upgrades like solar panels or other renewable energy systems, you could be eligible for a credit that covers a portion of the installation costs.

Beyond these well-known credits, your business may qualify for industry-specific credits, such as those for manufacturing, agriculture, or small-scale production. It's worth exploring what tax credits are available to you, as these can vary by location or industry. The IRS website and your tax professional can be helpful resources to ensure you’re not missing out on valuable credits.

Pro tip: Tax credits require specific documentation to prove eligibility, so keep careful records of your expenses.

6. Conduct a year-end inventory

If your business sells products, conducting a year-end inventory count is crucial. This process helps you accurately report the value of your inventory and identify any obsolete or damaged goods that can be written off.

Writing off unsellable inventory can lower your taxable income, which means you’ll owe less in taxes. Additionally, having an up-to-date inventory count ensures that your financial records are accurate, which is critical when filing your taxes.

By reviewing your inventory at year-end, you’ll identify items that need to be removed from your books and gain insight into sales trends, allowing you to plan for the future. This is a great time to assess what’s selling and what’s not, helping you make better purchasing decisions in the coming year.

Pro tip: Use accounting software or inventory management tools to keep detailed records throughout the year. This will speed up the year-end inventory process and ensure that you have accurate records for tax reporting and audits.

7. Consider hiring a professional

Navigating tax laws as a small business owner can be complex, and that’s where a tax professional comes in. A tax advisor or accountant can help you identify deductions or credits you may have overlooked, potentially saving you significant money. They stay current on tax regulations, which means they can guide you on the latest tax-saving opportunities, including industry-specific credits.

Additionally, working with a financial advisor can offer further benefits. As experienced financial advisors, my team and I can help you plan your overall financial strategy, helping you save on taxes and make smart long-term financial decisions. We can collaborate with your tax professional to balance tax strategies with retirement planning, investment opportunities, and cash flow management. This teamwork helps ensure that your short-term tax savings align with your long-term financial goals.

A tax professional and a financial advisor can help you comply with tax laws, help you avoid costly mistakes, penalties, or audits. By working with a team of experts, you can feel more confident in your tax filings and financial future.

Pro tip: Schedule a consultation with a tax advisor and a financial advisor before the year ends. This gives you time to implement any recommended strategies and ensures you get the most out of your deductions and credits for the current tax year while also preparing for your financial goals in the long run.

My colleagues and I at Allegiant Wealth Strategies are happy to meet with you for a free, no-strings-attached consultation. Please contact us here or call (269) 218-2100 for an appointment.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to ensure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

Allegiant Wealth Strategies offers securities and advisory services through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Allegiant Wealth Strategies has offices in Battle Creek and Portage, Michigan, from which we serve Calhoun County, Kalamazoo County, and Kent County (Grand Rapids). The Allegiant Wealth Strategies team offers no-obligation financial planning consultations; call 269-218-2100 or contact us here.