By Will Paustian, CFP®
Tax season is here, and for many business owners, this can be the most stressful time of the year. Thankfully, there are financial professionals available to help. At JGP Wealth Management, we work with a variety of business owners, many of whom run wineries and distilleries, and we understand the tax implications of their business operations. Here are the top 5 questions business owners should ask during tax season and what you can do to minimize your tax liability.
What expenses are tax-deductible?
Many business expenses are tax-deductible and can help reduce your taxable income significantly. Some common examples of business expenses include:
- Advertising and marketing
- Business insurance
- Legal and professional fees
- Office supplies
- Phone and internet
- Software subscriptions
- Business use of your vehicle
- Continuing professional education and training
- Memberships to professional organizations
Tax-deductible business expenses need to be ordinary and necessary to operate your business. It’s also crucial that you have receipts for all the expenses you claim on your tax return in case an audit were to occur.
In addition to these basic expenses, qualifying business meals purchased in a restaurant are 100% tax-deductible for the 2022 tax year. Qualifying meals are those between an owner or employee and a business contact. These meals will revert to 50% tax-deductible for the 2023 tax year, so be sure to take advantage of the increased deductibility while you can.
Can I claim charitable donations?
Businesses can deduct charitable donations on their tax returns, including cash contributions, in-kind donations, and travel expenses related to volunteering, such as mileage. For in-kind donations of business inventory, you can deduct the fair market value of the goods on the day of the gift. In general, a company can deduct up to a maximum of 50% of its adjusted gross income computed without regard to net operating loss carrybacks if certain conditions are met. Charitable donations, whether made outright or through a donor-advised fund, are a great way to give back to your community while also reducing your tax liability.
Should I file estimated taxes?
Depending on your business structure, you may be required to file estimated taxes throughout the year. Generally, sole proprietors, LLCs, and S Corps fall into this category. If you expect to owe more than $1,000 in tax at the end of the year, you should file estimated taxes. Self-employed taxpayers are responsible for paying estimated tax payments quarterly for both income tax and self-employment taxes. The penalties and interest incurred for late or missing payments or underreporting your income are costly and entirely preventable with an organized system for staying on schedule with quarterly payments.
What is the Healthcare Tax Credit?
Small business owners who provide health insurance to their employees can qualify for the healthcare tax credit. You can claim up to 50% of the cost of the premium you pay for employees even if you only pay a portion. To qualify, you must meet the following criteria:
- You have fewer than 25 full-time employees.
- The average annual salary of employees must be $56,000 or less (indexed for inflation).
- You pay 50% of the premium for your employees.
- Offer a qualified health plan through the Small Business Health Options Program Marketplace (SHOP).
This credit is only available for business owners for two consecutive years, so if you haven’t yet taken advantage of this credit, then consider utilizing it for the 2022 tax year.
Am I eligible for a retirement plan?
There are several different tax-advantaged retirement plans available to small business owners, including the solo 401(k), the SEP IRA, and the SIMPLE IRA. A solo 401(k) is designed for business forms with only one employee, the business owner; SIMPLEs can be used for businesses with more employees, though they are capped at 100 employees.
Since most businesses will have more than one employee, SIMPLE IRAs are generally more common. According to the IRS, an employee can participate in a SIMPLE IRA if they earned at least $5,000 in compensation from the business in at least two previous years.
Keep in mind that SIMPLE IRAs have strict rules regarding employer contributions, which are mandatory. They either have to give an annual 3% match to every plan participant or make a 2% nonelective contribution for every eligible employee. If you fail to make the correct contributions, your plan could lose its qualified status or incur penalties and fines from the IRS.
Choosing to add an employer-sponsored retirement plan to your company can be a great way to take advantage of tax credits, including those for setting up a new plan and auto-enrolling employees. You may also be eligible for additional tax deductions by making qualified employer contributions on behalf of your employees. It’s important to review your options with a qualified financial professional before making a decision on a retirement plan, as each plan type comes with its own unique benefits and drawbacks.
How We Help
If you’re a business owner with questions like these, we’re here to help. At JGP Wealth Management, we have experience working with business owners and can help you navigate tax season with confidence. Reach out to me at firstname.lastname@example.org or 503-446-6450 to learn more.
Will Paustian is a financial advisor at JGP Wealth Management, an independent, fee-based financial advisory firm in Portland, Oregon. Since joining the JGP family in 2020, Will has played an integral role in the firm by combining his knowledge of the financial world with a strong and dedicated work ethic in order to help our clients achieve their financial goals. Will is known for his commitment to walking our clients through everything they face in their financial lives, celebrating their victories along the way. He specializes in serving executives and entrepreneurs, specifically in the food and beverage industry and business owners planning to pursue an exit, tailoring his solutions to fit their unique financial challenges and opportunities.
Will graduated from the University of Oregon’s Robert D. Clark Honors College with a bachelor’s degree in finance and entrepreneurship, minoring in economics and is a CERTIFIED FINANCIAL PLANNER™ professional. He was awarded the Stamps Leadership Scholarship and served as a student trustee on the University Board of Trustees. He also spent time abroad in the UK studying behavioral economics at the University of Oxford. When not in the office with clients, Will enjoys a wide variety of activities, from hiking and fishing to cycling and traveling. He, along with his family, enjoys the sights and sounds of Oregon, cheering on the Oregon Ducks and the Portland Trailblazers and exploring the unique restaurants and businesses around the Portland area. To learn more about Will, connect with him on LinkedIn.