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Ryan Foley is a partner at Worcester tax consultancy Cunningham & Associates. Reach him at rfoley@jec-llc.com and 508-400-5827.
Updated: March 7, 2022
Know How
Top tax tips & deduction secrets for your business
By Ryan Foley
Here are the top seven small business tax tips and deductions you can use to keep more of what you make.
R&D credits for small business
Research and development are lucrative for companies that undertake or sub out any design work. Manufacturing, construction, engineering, architecture, software, and tech firms can benefit significantly.
You can take the R&D tax credit every year. But you can also look back on the prior three to four years and reclaim unused credits, offsetting the taxes you've already paid.
The result? A nice, surprising refund you can reinvest.
Employee retention credits
Congress approved enhanced employee retention tax credit rules. Business owners can claim up to $26,000 in refundable payroll tax credits per employee. Qualifications include revenue decline, capacity restrictions, supply chain disruption, commerce disruption, partial/full shutdowns, work from home orders, or vendor/customer restitution in 2020 or 2021 due to the COVID-19 pandemic.
Business entities structure planning
More often than not, entity structure is a major consideration for a company at formation. But it's seldom looked at again as the company's situation changes, along with the ever-changing tax code. This results in substantial missed opportunities to optimize entity structure and minimize taxes. For example, C-corporations have the least flexibility in tax planning. As a result, they're typically not the best choice in the current landscape. The importance of entity structure choice is amplified when business owners consider their exit. In many cases, owners consider this too late and overpay their taxes significantly. Proper and timely planning allows for optimization of entity structure.
Balanced compensation
The nature of the qualified business income dictates income taxes and employment taxes the company and business owner pay. There are many tax consequences when small business owners take money out of their business, whether W-2 income, distributions, guaranteed payments, dividends, etc. The best strategy requires an analysis to determine the most efficient compensation structure.
Accrual vs. cash accounting
The Tax Cuts and Jobs Act outlined new rules for small businesses, defined as those with under $25 million in three-year average annual revenue. One of those rules allows companies more flexibility when it comes to how they report income and business expenses. Companies can elect to change methods to provide a one-time significant deduction in the year of the change and ease in reporting going forward.
Inventory reporting
Like the accounting method changes, small businesses can look at different ways to report inventory on a tax basis using internal inventory policies. This could allow for ease in reporting and a potential one-time deduction for expensing a portion of your inventory.
Cost segregation
Cost segregation is a strategy for real estate owners, allowing for significantly accelerated depreciation deductions through the segregation of building components. Depending on the type of building, you can look forward to anywhere from 20% to 70% of additional year-one depreciation.
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