Small-Business Owners: 7 Tax Tricks To Maximize Your Refund
Written by
Laura Beck
Edited by
Jenna Klaverweiden
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As a small-business owner, tax season can feel overwhelming, to say the least. However, with the right strategies, you can turn tax time into a chance to boost your bottom line.
GOBankingRates spoke with small-business owners who shared their best tax tricks to help you maximize your refund this year.
Leverage Section 179 Deductions
“As a small-business owner, one of the most effective ways to lower your taxable income and maximize your refund is by taking advantage of the Internal Revenue Service’s Section 179 deduction,” explained Thomas J. Brock, CFA, CPA, an expert for RetireGuide. “This aspect of the tax code allows you to deduct the full purchase price of tangible property, such as machinery and equipment purchased for use in a trade or business, in the year of purchase rather than depreciating it over time.”
If you’ve invested in essential business equipment during the tax year, this could mean huge savings.
Claim Your Home Office Deduction
If you work from home, don’t overlook this valuable deduction. “Generally, to claim this valuable tax break, you must exclusively and regularly use part of your residence as your primary place of business,” Brock said.
He also shared that, per the IRS, taxpayers who qualify for the home office deduction can choose one of the following two methods to calculate the allowance.
“The regular method allows direct expenses to be deducted in full. Indirect expenses, such as mortgage interest, property taxes, utilities and homeowners insurance, are based on the percentage of the residence devoted to business use,” he said. Alternatively, there is a simplified option in which $5 per square foot of the home used for business purposes is deducted, for a maximum of 300 square feet.
Find a Tax Strategist, Not Just a Tax Preparer
According to Jonah M., owner of a script consulting business, there’s a big difference between someone who simply files your taxes and someone who helps you strategize.
“I made the switch from using a traditional CPA to working with a dedicated tax strategist three years ago, and it’s saved me thousands annually,” he said.
A good tax strategist doesn’t just look at what happened last year but helps you plan for the coming years to minimize your tax burden legally and effectively.
Maximize Retirement Contributions
Small-business owners have access to powerful retirement savings options, like SEP IRAs, SIMPLE IRAs and solo 401(k) plans, that offer higher contribution limits than traditional employee plans.
“Contributing the maximum amount to your retirement accounts serves two purposes,” Jonah said. “It helps secure your future while providing immediate tax benefits by reducing your taxable income for the current year.”
Track Vehicle Expenses Carefully
If you use your vehicle for business purposes, you can deduct these expenses using either the standard mileage rate or the actual expenses method.
Most small-business owners don’t realize how quickly vehicle deductions can add up. “I keep a dedicated logbook in my car and use a mileage tracking app as backup,” Jonah said. “I started doing this in earnest last year, and I caught about $3,000 that I definitely would’ve missed before.”
Leverage the Qualified Business Income Deduction
“The QBI deduction can allow eligible small-business owners to deduct up to 20% of their qualified business income,” said Arron Bennett, CEO of Bennett Financials. He added that this strategy is often overlooked, but it can be a game-changer, especially for those in pass-through entities like S-corporations, partnerships and sole proprietorships.
Bennett recommended reviewing your entity structure to see if you’re eligible for this deduction. “If that’s the scenario, ensure that you’re exceeding the minimums and not giving yourself any leeway for mistake by seeking out a tax expert so that you can completely maximize this benefit,” he said.
Watch for State and Local Tax Credits
“Depending on the location of your business, you might be able to qualify for state and local tax credits or incentives,” Bennett said. “These can vary from credits for hiring employees in a particular location to incentives for being green. Small-business owners do not think about these often, but they can be extremely cost-saving.”
He said he always suggests staying up to date on local programs that can help business owners save money.
Tax planning shouldn’t be a once-a-year scramble. By implementing these strategies throughout the year and working with qualified professionals, small-business owners can significantly reduce their tax burden while staying compliant with IRS regulations.
Remember that tax laws change frequently, so staying informed or working with a knowledgeable tax professional is crucial to ensuring you’re taking advantage of all available benefits for your small business.
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