17 essential small business tax tips for keeping more of your money

Even though most business owners feel confident filing their taxes, many struggle with maximizing tax incentives and keeping track of documentation and expenses, according to our Entrepreneurship report. Less than 50% of respondents who own say they're very confident in how to file their business taxes correctly. 

But don’t worry. We’ve put together 17 small business tax tips that will help you reduce stress, maximize tax breaks, and help you stay compliant come tax time. 

Tax season is an especially stressful time for small business owners. If you procrastinate on tax season preparation, it might be time to rethink your strategy. Preparing your books for tax season sooner rather than later relieves tax-related pressure and reveals opportunities for the year ahead.

Let’s dig deeper into the best practices for getting your books ready for tax season, avoiding common mistakes, and maximizing refunds.

1. Reconcile to source documents

As a small business owner, you’re responsible for accurately reporting your business income and expenses on your tax return. One of the most important tips for tax preparation is to reconcile your books to your source documents, such as: 

• Business bank account statements
• Credit card statements
• Receipts
• Invoices

Reconciliation involves using source documents to ensure:

1. Each transaction in your accounting software is accurate and complete
2. There are no duplicate entries

By reconciling your financial transactions to your source documents, you can ensure that your business expenses and income are reported correctly, which can help you minimize your tax liability and avoid potential penalties from the IRS.

2. Organize your chart of accounts

Another key aspect of making tax time as easy as possible is maintaining a useful chart of accounts. The chart of accounts lists all the categories and subcategories of transactions for your transactions.

When creating your chart of accounts, consider your business's specific needs. For example, if you're a service-based business, you might have different categories than a retail business. Some common account categories that may be useful for most small businesses include:

• Income: Sales, revenue, and interest income 
• Expenses: Rent, utilities, and office supplies
• Assets: Equipment, vehicles, and patents
• Liabilities: Loans and accounts payable 

By organizing your chart of accounts, you can easily categorize and track all your transactions—saving you time come tax time.

3. Classify your business correctly

Choosing the right legal structure for your business is a foundational decision that significantly impacts your taxes. Each structure has different tax implications, and understanding them can save you money and headaches down the road. 

Here's a brief overview of common business structures and their tax implications: 

Sole proprietorship: While this structure is the easiest to set up, you'll be personally liable for business debts, and you'll have to pay self-employment taxes.

Partnership: This structure is similar to a sole proprietorship but involves two or more owners. Each partner shares in the profits and losses and is also personally liable for business debts. Each partner's share of partnership income may be subject to self-employment tax.

Limited liability company (LLC): An LLC offers some liability protection, separating your personal assets from business debts. It offers flexibility in how you're taxed—you can choose to be taxed as a sole proprietorship, partnership, S-corp, or C-corp.

S Corporation: This structure can offer tax advantages by allowing you to pay yourself a salary and take distributions, potentially lowering your self-employment tax burden. However, it has stricter requirements and more complex tax filing procedures.

C Corporation: This structure categorizes your business as a separate legal entity that pays its own taxes. Larger companies or those seeking investors often prefer it …. C-corps can face double taxation on profits (at the corporate level and again when distributed to shareholders). 

Many new business owners default to a sole proprietorship because it's the simplest to set up, but it might not be the most tax-efficient option in the long run.

Carefully consider your business needs, long-term goals, and tax implications before deciding on a structure. Don't hesitate to consult with a tax professional or legal advisor to determine the best fit for your specific circumstances.

4. Separate personal and business accounts

One of the easiest mistakes to make as a small business owner is to mix personal and business finances. Commingling the two can lead to confusion and make it more difficult to track your business finances accurately.

Consider opening a separate business bank account and credit card for your business expenses—and only using those accounts for business purposes.

When personal and business expenses are combined, it becomes challenging to track your business's financial health and file your taxes accurately. It can also be difficult to track which expenses are deductible and which are not.

5. Make use of tax breaks and deductions

When it comes to tax time, an easy way to save money is to ensure you take advantage of all the tax breaks and deductions available to your business. Understanding and utilizing these tax benefits can reduce your taxable income.

Some of the most common tax breaks and deductions for small business owners include:

• Business expenses: Any ordinary and necessary business expenses incurred during the year are deductible, such as office supplies, rent, utilities, and travel expenses.
• Home office deduction: If you work from home, you may be eligible for a home office deduction. You can deduct a portion of your home expenses, such as rent, utilities, and maintenance, based on the percentage of your home used for your business.
• Retirement plans: Contributions to a qualified retirement plan, such as a 401(k) or IRA, are tax-deductible and can reduce your taxable income.
• Health insurance: If you are self-employed, you may be able to deduct the cost of health insurance premiums for yourself, your spouse, and your dependents.

Understanding and utilizing tax breaks and deductions can help you save on your tax bill so you can keep more of your hard-earned money.

6. Explore tax credits

Unlike deductions, which reduce your taxable income, tax credits directly reduce your tax bill. This can result in significant savings.

Some examples of tax credits available to small businesses:

Work Opportunity Tax Credit (WOTC): This credit is available to businesses that hire individuals from certain target groups, such as veterans, ex-felons, and those receiving public assistance. This credit is currently set to expire on December 31, 2025.

Research and Development (R&D) Tax Credit: This credit encourages businesses to invest in innovation by offering a credit for qualified research expenses.

Energy Efficiency Tax Credits: Businesses can take advantage of these credits by making energy-saving improvements, such as installing solar panels or energy-efficient equipment.

Small Business Health Care Tax Credit: This credit helps small businesses provide health insurance to their employees.

Take some time to research these and other tax credits, or consult with a tax professional. This will help ensure you're taking advantage of every opportunity to minimize your tax liability.

7. Save for retirement

Planning for retirement is essential, even for a small business owner. It's easy to get caught up in the day-to-day demands of running your business, but securing your financial future is crucial. Saving for retirement benefits you personally and can also offer valuable tax advantages for your business.

Retirement savings options available to small business owners:

SEP IRA: A Simplified Employee Pension (SEP) IRA allows you to contribute directly to traditional IRAs (Individual Retirement Accounts) set up for yourself and your employees. It's a simple plan to administer with relatively low contribution limits.

SIMPLE IRA: Savings Incentive Match Plan for Employees (SIMPLE) IRAs are another option for small businesses with fewer than 100 employees. They allow both employee and employer contributions, with higher contribution limits than SEP IRAs.

Solo 401(k): If you're self-employed or a small business owner with no employees, this type of 401(k) plan offers even greater flexibility. You can contribute as both an "employer" and an "employee," potentially maximizing your tax-deferred savings.

Defined Benefit Plan: While less common for small businesses, defined benefit plans (also known as pension plans) provide a guaranteed income stream in retirement. They can be more complex to administer and may require actuarial services.

Remember, contributions to these retirement plans are often tax-deductible, reducing your current taxable income. Consult with a financial advisor to determine the best retirement savings plan for your specific circumstances and goals.

8. Regularly review your financials

As a small business owner, you need to know your income, expenses, profits, and losses to make informed decisions and create a tax strategy.

Your financial statements, including your profit and loss statement, balance sheet, and cash flow statement, are like a report card for your business. Regularly reviewing these documents helps you catch potential problems early and make the necessary adjustments before they become more significant.

9. Record transactions promptly

As a small business owner, keeping your financial records up-to-date and accurate is essential. This includes recording transactions promptly and regularly. Whether it's a purchase, sale, or expense, every transaction needs proper recording to ensure your finances are accurate and reliable.

The longer you wait to file a transaction, the more likely you are to forget important details. If you're not keeping accurate records, you may miss out on potential tax deductions, overpay taxes, or even face legal consequences.

With accounting software that syncs to your bank, like QuickBooks Online, you can automatically record income and expenses.

10. Understand the tax obligations of remote employees

The rise of remote work has brought many benefits, but it's also created new complexities for businesses, especially regarding taxes. With employees spread across different states or even countries, it's crucial to understand your tax obligations to avoid potential legal and financial headaches.  

Each state has its own tax laws and regulations, and you'll need to withhold and remit income taxes appropriately for each employee based on where they live and work. This becomes more complicated with international employees—you might have to navigate international tax treaties and foreign labor laws.  

Example: If you have an employee in another country, you'll need to comply with that country’s tax laws, including Social Security contributions, income tax withholding, and potentially other payroll taxes and labor laws. You'll also need to stay informed about data security and privacy regulations in that country to ensure you're handling employee data correctly.  

Staying informed and seeking expert guidance is essential to navigate these complexities. Consider consulting with a payroll specialist or tax advisor to ensure you meet all your obligations and avoid potential penalties.

11. Automate where you can 

One key to running a successful small business is learning to be efficient with your time. As the owner, you have a lot of responsibilities on your plate, and it can be easy to get bogged down in time-consuming administrative tasks that distract you from more important business activities.

That's where automation comes in. Automated accounting can be a game-changer for small business owners, allowing you to streamline your processes and save valuable time that you can use for other important tasks.

Automated accounting for bookkeeping will keep your books up-to-date and ready for tax time.

12. Keep good records

As a small business owner, keeping accurate records is crucial to ensuring you can file your taxes correctly and avoid any potential tax audits or penalties. Also, by keeping detailed records of your business expenses, you can maximize your deductions and reduce your taxable income.

In addition to tracking income and expenses, you’ll want to keep accurate records of any assets or inventory your business may have. This can include tracking the value of any equipment or property and maintaining an inventory of any products you sell.

Beyond just staying compliant with the tax code, keeping good records can also help you make more informed business decisions.

13. Seek expert advice

As a small business owner, it's important to recognize when it's time to seek expert advice. While you may be an expert in your industry, you likely don't have the same level of expertise around tax laws.

The tax code is constantly changing, and keeping up with the latest regulations and requirements can be difficult. A tax professional can help you navigate these complexities and ensure your tax return is accurate and compliant with all laws and regulations.

Even if you feel confident in your knowledge and abilities, using a CPA or ‌bookkeeper can provide valuable insights—tax or otherwise.

14. Prioritize the balance sheet

It’s easy to get caught up in day-to-day operations and focus solely on maximizing profits. However, it's important to remember that a healthy balance sheet is just as important as your profit and loss (P&L) statement. 

Balance sheet items can often be overlooked. Income and expenses tend to appear on your bank statements—making them hard to miss. But don’t forget to account for balance sheet accounts when filing taxes, such as assets and loans.

15. Keep receipts for all transactions

One of the most important tasks for business owners is to track expenses. This ensures you have all the documentation you need if you are audited by the IRS. One of the simplest and most effective ways to keep track of your business expenses is to keep receipts for all transactions. 

Whether a cup of coffee on a business trip or a large equipment purchase, every expense should be documented to claim the appropriate tax deductions and reduce your taxable income.

16. Utilize online payments

One of the most important aspects of managing your finances is accepting and tracking customer payments. However, managing payments does not have to be a hassle. With the advent of technology, it is now easier than ever to receive payments from customers using online payment methods.

Online payment platforms can help with tracking payments and reducing errors. Many online payment platforms also provide detailed transaction records, streamlining tax time.

17. Focus on running your business

Running a small business is no easy feat, and there are many tasks to juggle daily. From managing employees to handling customer inquiries, finding time to focus on the bigger picture can be difficult.

To ensure that your business stays on track financially, prioritize your tax tasks and delegate responsibilities when necessary. While you may want to handle everything yourself, this can lead to burnout and a lack of productivity.

Instead, consider hiring employees or outsourcing tasks to free up your time and avoid mistakes when tax time comes.

Find peace of mind come tax time

Managing small business taxes can be overwhelming, but some strategies can help alleviate the stress. By keeping accurate records throughout the year and utilizing tools like accounting software, small business owners can have a clearer picture of their tax liability come tax time.