5 Tips to Maximize Small Business Tax Writeoffs

or CPA Curt Mastio, helping small business owners maximize their tax write-offs is not only smart tax strategy, it is smart business strategy.

“If you can save a small business a certain amount in taxes, that might mean that they can afford to invest somewhere else. They might be able to afford things like expanding a product line, a higher bonus for an employee, or even hiring new employees,” he said. 

Curt is the managing partner of Founder’s CPA, which provides accounting, tax and CFO services to fast growing companies, many of which have raised venture capital. 

“We plug in as an accounting solution to help keep things in order from a compliance and reporting and financial standpoint, so that they can focus on their business and do what they do best.”

We asked Curt for the tips he gives small business owners to reduce business taxes and avoid common pitfalls. While he stressed that every business is unique, he gave us five general tips to consider: 

• Keep accurate and up-to-date records
• Categorize revenue and expenses carefully
• Utilize tax credits
• Evaluate your entity type for tax optimization
• Defer income or accelerate expenses

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Tip 1:  Keep accurate and up-to-date records

One of Curt's first tips for small business owners is to keep meticulous records of every transaction. “It’s absolutely critical. I’d say it’s the foundational step to being tax compliant and tax efficient.”

When clear records aren’t maintained, he says business owners risk missing out on deductions. A common scenario he sees is when a one-off expense is paid for through a personal credit card and forgotten come tax time. “Had they been putting all business-related expenses on the business credit card and keeping good records, they could have increased the deductions available to them on their tax return.”

A bookkeeping best practice is to maintain essential records including:

• Invoices and receipts: customer invoices, sales receipts, purchase orders
• Financial statements: bank statements, credit card statements
• Tax returns: keep a copy for at least three years after filing, as well as W-2s, and 1099s 
• Employee records: pay stubs, contracts, tax forms such as W-4 and I-9.

There are free and paid apps that can help you keep better track of your expenses. Curt often recommends apps like Expensify, Quickbooks Online, Wave and Xero. If you have a Novo business checking account, you can integrate with a number of popular accounting and bookkeeping platforms.

There are also payroll services that can help you manage and track payroll-specific records.

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Tip 2: Categorize revenue and expenses carefully

His next tip is to carefully review what you are categorizing as revenue and expenses. 

Curt says, “If you're a DIY bookkeeper type and don't have a strong fundamental understanding of accounting, there may be instances in which you miscategorize things. For example, I've seen in the past where clients come to us and said they had revenue of X, and then as we ask more questions, we realize that they were reporting something as revenue that was actually an investment in the business. When you receive cash as an investment into the business, it's generally not going to be taxable, whereas revenue for selling your goods or services is included in your taxable income.”

If your small business has multiple legitimate revenue streams, Curt suggests separate accounts or categories for each stream to make it easier to track and analyze. He also tells his clients to periodically review their revenue buckets to ensure they align with current business operations and tax requirements. As your business evolves, new revenue streams may emerge, and existing categories may need adjustment.

When it comes to categorizing deductible expenses, he says a small business owner can educate themselves or, ideally, consult with a professional who understands your industry.

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Tip 3: Utilize tax credits

If you’re searching for “tax loopholes”, what you may really be looking for are tax credits. And these can make a big difference. “Fundamentally speaking, a tax credit is going to be more valuable to you than a tax deduction, because a tax credit is going to be a one-to-one offset to your total tax bill, whereas a tax deduction is just going to decrease the amount of taxable income you have,” says Curt.

The most common available tax credits for small businesses are:

• Research and Development (R&D) Tax Credit: This R&D credit is designed to encourage businesses to invest in research and development activities such as developing or improving products, processes, or software. 
• Work Opportunity Tax Credit (WOTC): The WOTC credit provides a tax credit to businesses that hire individuals from targeted groups with barriers to employment. 
• Small Business Health Care Tax Credit: The Small Business Health Care Tax Credit helps offset a portion of the premium costs for qualifying coverage.
• Employee Retention Credit (ERC): The ERC credit was introduced as a COVID-19 relief measure but has been extended beyond the pandemic. It provides a refundable tax credit to eligible employers who retained employees during specific periods impacted by COVID-19

To find all the applicable tax credits, Curt recommends checking sources like the SBA, IRS.gov and talking to people within your network. “If you know people doing similar things, ask them what they’re doing.”

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Tip 4: Evaluate your entity type for tax optimization

The next tip is to consider whether or not your current entity structure is the most tax efficient entity type for your business.

For example, you may benefit from having a pass-through business or flow-through entity, which is one of five legal business structures where the business income or losses "pass through" to the owners or shareholders, who report the income or losses on their individual tax returns. Each structure has its own tax rules.

One of the main advantages of pass-through entities is that you can avoid the "double taxation" that occurs with C-corporations. In a C-corporation, the business pays taxes on its profits at the entity level, and the shareholders also pay taxes on any dividends or distributions they receive.

In addition, Curt says, “There are certain entities that give you optionality, for example, if you're an LLC, you can elect to be taxed as an S corp or you can elect to be taxed as a C corp.” 

Different states and local governments have different regulation and registration requirements for forming and operating your structure, so he also strongly recommends consulting with a tax professional or attorney when making this decision.

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Tip 5: Defer income or accelerate expenses 

A final tip is to consider deferring income or accelerating expenses if you are a cash basis taxpayer. Curt explains it is about optimizing timing. “You're still paying taxes, it’s just a matter of when you pay the tax.”

Consider the timing of things like invoicing, payment plans and sales. If it’s possible to delay any of these until the following year, you could defer income, which could bring down your tax bill in the present. 

Conversely, he says small business owners should see if they can accelerate expenses. For example, you may be able to accelerate the payment of rent, employee bonuses, insurance premiums, equipment and supply purchases (which may qualify for the Section 179 deduction). 

Remember, while deferring income and accelerating expenses can provide short-term tax benefits, it's essential to consider the long-term financial implications and the impact on cash flow. 

“At least today, we have certainty around what our tax rates are. Whereas next year, legislation could pass and you know, tax rates could rise considerably, right?  And so by deferring income, you actually pushed into a calendar year or tax year where the rates could be higher and it didn't actually help you out.”

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Takeaways

Depending on your business, you may find additional tax strategies to reduce your bill. Hiring temporary independent contractors instead of employees for project based work, making charitable donations and deducting health insurance premiums are options to consider, but Curt says the best way to ensure compliance with tax laws is to consult with a professional. 

He says, “not only can you avoid all sorts of compliance related issues that can cost you more down the road, but it also frees you up to focus more on what you're good at - growing your business.”

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