4 tax tips for small businesses in 2022
With the end of the 2021/22 financial year fast approaching, you may be trying to quickly organize your small business’ finances while preparing its tax returns. It is, therefore, crucial that you develop strategic ways to file your tax returns to maximize your profits while organizing your business’ taxes for the 2022/23 financial year. Read on for four tips to lower your tax bills in 2022.
1. Take advantage of tax rebates
One of the most effective ways to get additional money to maximize your business’ investment opportunities is by leveraging your tax rebates. A tax rebate is a reimbursement to your business when you pay more taxes than your tax liability. Check your company’s eligibility for offsets, concessions, employer rebates, and incentives to determine tax return opportunities. Some specific tax rebates you could leverage include spouse super contributions, educational refunds, and medical bills. You could also qualify for employee retention credit if your business experienced a total or partial shutdown in 2020 or 2021 due to the COVID-19 pandemic.
2. Create a retirement account
Whether you have workers or are a solopreneur, you could get tax benefits by providing or contributing to retirement plans such as IRA or 401(k). As a solopreneur, you qualify to set up a one-participant 401(k), also known as a solo 401(k). A solo 401 (K) allows you to make pre-tax contributions to your retirement fund, reducing your taxable income significantly. However, it is worth noting that you will pay income tax on your contributions when withdrawing your retirement benefits.
Setting up an employee retirement plan is also beneficial to your business, enabling you to save on employer payroll taxes. This is because it lowers the staff salaries and wages contingent upon the Federal Unemployment Tax Act (FUTA).
3. Deduct the business use of your vehicle
You are eligible for a tax deduction for each mile you cover for business purposes with a personal vehicle, whether owned or leased. To determine the tax-deductible, you should multiply the IRS mileage rate by the total number of miles driven for business reasons. Note that the mileage rate often fluctuates every year. For instance, the 2020 mileage rate was $0.575. Be sure to keep a log, especially if you do not have a specific car for business use, to enable the IRS to substantiate the mileage. You should also not include your daily commute to and from work when calculating business mileage as it is not deductible. This is because the IRS views these commutes as personal trips.
4. Make charitable donations
Contributing to a noble cause in the community or donating money to local nonprofits can enable your company to reduce its tax burden. However, there is a limit on the amount of money you can contribute in a tax year. For instance, corporations can only donate and write off at most 25% of their annual taxable income. As an individual, you can donate and write off 100% of your taxable income.
Making charitable donations does not only reduce your tax liability. It is also an effective way to connect with your target audience and build trust. According to recent data, clients have a four times higher likelihood of purchasing from a company with solid values, and a charitable donation is an excellent way to showcase this.
Reducing your tax bill is crucial to freeing up cash to enable your business to handle the adverse effects of COVID-19 and maximize profits. Leverage tax rebates, set up a retirement account, deduct the business use of your vehicle, and make charitable donations to minimize your business’s tax liability.