An analysis of the federal tax plans for small business owners in 2022 finds that the proposed changes to the standard tax rate and other provisions will have a significant impact on small business owners, but improve their situation only slightly.
The main objective of the Performance Improvement of Tax Plan is to help small businesses to improve their tax payment performance. This is to improve their customers’ payment performance and to reduce the tax bill. According to the National Federation of Independent Business, small business owners are “desperate for tax relief” and have “increasingly seen the tax code and how quickly the code can change”. So, how can we improve the tax plan?
For small businesses, a tax plan is a record of how much income tax the small business owner will pay. There are several ways to analyze the tax plan:
- Calculate your tax bill
- Calculate an example tax bill for an imaginary small business owner
- Calculate the tax bill for a small business owned by someone else
Many small business owners are not familiar with the tax laws and may not know how to prepare a tax plan for their small business. This means that they may not know how much they can deduct on their taxes or how much their federal taxes are. Therefore, they need good advice on the performance improvement of their tax plan. You will need to know about paystub generators that can aid you in managing your staff’s payroll.
5 Small Business Tax Strategies
As a small business owner, you know that the right tax plan can make the difference between staying in the black and facing an unexpected tax burden. That’s why we’ve developed 5 tax strategies to help you minimize your tax liability. They will help you save money on your tax liability and keep your business on track.
Leverage coronavirus tax relief
The Coronavirus Aid, Relief, and Economic Security Act (CARES), signed into law by President Trump on March 27, 2020, provides emergency relief to small businesses, including the provision of free cash flow, the deferral of up to $400,000 in taxes for each owner and the reduction of the value of the first $10,000 of a small business’ net worth. The legislation also allows for continued access to SBA-backed loans and grants. To provide relief to local small business owners, Congress has passed additional legislation in the past two years to help small business owners through the crisis. They are:
- Families First Coronavirus Response Act (FFCRA)
- Coronavirus Response and Relief Supplemental Appropria
Strategy № 2
Accelerate or defer Income
Small businesses that use the cash method of accounting can take advantage of some interesting tax planning strategies. Under the cash method, companies recognize income when it is received and expenses when they are paid. This allows businesses to better manage their cash flow and create a more accurate picture of their financial situation.
- Know When to Accelerate Income
On the other hand as a small business owner, you can accelerate your income this year. If you know that tax rates will increase next year, you will need to collect all the payments from your clients in 2022 and send the invoices to tax at the current tax rate.
- Know When to Defer Income
If, for example, you completed work for a client in December 2022 but have not yet invoiced them for your services, you could defer income to the next year by waiting to invoice the client until January 2023, thereby lowering your 2022 tax bill.
Strategy № 3
Retirement Account Set Up or Contribute
As a small business owner, you may think that your company’s retirement plan is a one-time event. But the truth is that your retirement plan is just as important in the long term as your short-term budget. Successful retirement plan design requires an ongoing evaluation and analysis of your company’s retirement plan, your plan options, and your situation.
So, one of the most important things that affect small business owners’ taxes is the ability to contribute to a tax-deferred retirement account. Setting up or contributing to a retirement account can reduce your taxable income and potentially lower your taxes. Effectively, the IRA and other retirement savings vehicles are the 401(k) for the masses. And starting in 2022, small business owners who contribute to a traditional IRA through a payroll deduction and who are eligible to take deferrals will receive a tax break on those contributions and accruals. With a Roth IRA, the owner can withdraw the money tax-free at any point, while a traditional IRA requires a five-year rolling period to access funds.
Take advantage of tax reform
As part of the TCJA, the QBI deduction was created to help small businesses and their owners minimize their tax liability. Eliminating the QBI deduction will help reduce tax liabilities for many small business owners.
Consider a tax status change
Small business owners should consider a tax status change. Your business structure will impact how you file taxes for small business owners. As a small business owner, you can transfer your activity to С Сorporation, partnership, etc to take advantage of lower taxes. Nobody will restrict you in your activity whatever is your industry. If you render services in the financial industry your clients still can use pay stub apps or online generators. If you sell products online, you still can continue your business. The status change will only provide you with a better chance to improve the effectiveness of your tax plan which means reducing your tax burden.
The core of tax planning for small businesses is to determine what is the most efficient course of action from a tax perspective. To improve performance, small business owners should seek tax strategies that minimize their taxes and reduce their tax burden. Therefore, the performance improvement of the tax plan can be attributed entirely to better planning. It can also be attributed partly to lower taxes and high revenues. If you use at least one of the strategies to improve your tax plan you will significantly better your tax obligations.