5 Tax Strategies for Individual Entrepreneurs and Small Business Owners To Save Money

If you are an individual trader or a small business owner, tax planning is something that you probably do not pay much attention to. You have your annual tax return and that’s about it. You probably even pay an accountant to file your tax return for you. Well, one of the reasons for this is that it is not easy to understand. 

Here, we will try to take some of the mystery out of tax planning for small business owners and traders.

Tax planning strategies

1. Benefit from the tax reform

The Tax Cuts and Jobs Act (TCJA) also created the qualifying business income (QBI) deduction, which lets pass-through business owners deduct up to 20% of their share of the business’s income, depending on a number of rules and limits.

If their income is too high, owners of specified service trades or businesses (SSTBs) cannot claim the deduction. SSTBs are any service-based business that depends on the reputation or expertise of its employees or owners. The only exceptions are engineering and design firms.

The following are examples of these types of SSTBs:

• Consulting firms
• Medical practices
• Law firms
• Accountants
• Financial advisers
• Performing artists

2. Deduct Straight Away Any Assets That Are Less Than $20,000.

At the end of the financial year, the value of existing depreciable assets held by some smaller companies is less than $20,000 in some cases. They are eligible to make an immediate deduction for these assets, which will bring their tax liability down. And it makes no difference if these assets are brand new or previously owned in any way.

In the year that the asset is first utilized or installed ready for use, eligible businesses are able to make an initial claim for a deduction that corresponds to the business portion of the total cost of the asset.

You can buy more than one asset as long as the total cost of those assets is less than the right threshold.

In order to qualify for the immediate write-off of assets, your company, assuming it is a small one, will need to use the simplified depreciation criteria. It is not applicable to assets that do not fall under the purview of such rules and so cannot be employed.

The eligibility conditions and the threshold for the instant asset write-off have evolved throughout the course of time. You are responsible for determining whether or not your company is eligible for the deduction and applying the appropriate threshold amount, which will vary based on when the asset was purchased, when it was first used, or when it was installed and ready for use.

3. Defer or expedite income

On their books and tax returns, numerous small enterprises adopt the cash method of accounting. In accordance with the cash approach, a corporation recognizes income when it is received and expenses when they are paid, i.e., when cash really changes hands. This creates fascinating tax planning opportunities.

If you expect to be in a lower tax band the following year, you may wish to defer income until the following year, when you will pay less in taxes.

When to postpone earnings

For instance, suppose you completed some work for a client in December 2021, but you have not yet invoiced the client for your services. If you wait until January 2022 to bill your client for the December work you performed, you can defer the income to the following year and reduce your tax liability for 2021.

When to Bump up Earnings

On the other hand, it may make more sense to accelerate income into this year if you anticipate that tax rates will increase in the near future. In this case, you might want to send your client an invoice and try to get paid in 2021, so that a bigger chunk of your income will be taxed at your current tax rate.

Expenses follow the same principle. If you are in a high tax bracket this year, you may wish to accelerate expenses in 2021 in order to lower your taxable income. When to accelerate or delay income and expenses is outlined in the following advice.

4. Depreciation of an Investment Property

The advantages offered by a property depreciation report are available to individuals and owners of small businesses alike who have rental properties in their portfolio. They are able to make use of the report to claim write-off deductions for their buildings as well as the greatest amount of depreciation for their rental properties.

5. Private company loans (also known as “DIV 7”)

Sometimes, proprietors of small businesses operating under the umbrella of a company will borrow money from their company. If they borrowed money from their company in the income years before this one, then they are responsible for repaying the principal as well as the interest during this income year.

They have until the deadline to either fully repay the debt for the current income year or sign onto a loan agreement. Either option is acceptable. If they don’t, the money will be treated as a dividend that hasn’t been taxed, as per Division 7.

Conclusion

Tax planning for individual traders and small business owners is important to consider before year-end. The key is to plan for the tax implications of events that may occur during the year. Doing so will help you avoid potential problems and put you in a better position to take advantage of chances to lower your tax bill.