With the 2023 tax year drawing to a close, now is a good time to review your small business’ financials to see where you may be able to strengthen revenue, grow investments and implement long-term tax strategies.
Here are a few ways you can use tax season to reinvest into your business’ success while also leveraging certain tax benefits.
Consider How Your Business is Structured and Potential Benefits
If your business has experienced changes, especially positive growth, over the past couple years, it may be time to consider changing its tax structure to protect your business from personal liabilities.
For example, if your small business is set up as a sole proprietorship and has grown or expanded over the past year, and you are still the sole owner, it may make sense to separate your personal and business finances and responsibilities more by structuring your business as a Single-Member Limited Liability Company, or LLC.
This structure is the most popular for emerging small businesses that want more legal protections and separation from personal credit and assets. Your local Small Business Development Center or tax advisor are great resources for advice.
The IRS website also lists different types of business structures, including a sole proprietorship, partnership, corporation, S corporation and Limited Liability Company (LLC).
Invest in Needed Equipment
If you are considering buying equipment soon, now is the time to do it. The IRS’ Section 179 tax code allows small businesses to deduct equipment purchases in certain categories up to $1,160,000 when it is acquired and put in use in 2023. Whether your business could use a new pizza oven, furniture, vehicles, computers or other equipment necessary for your industry, investing in these items is a wise move.
Qualifying items include:
- Off-the-shelf software (i.e., software that is not custom-developed and is available to the general public)
- Equipment purchased for business use
- Office furniture or equipment
- Most work vehicles that cannot be used as personal vehicles (forklifts, trailers, etc.)
Under Section 179, you can deduct 80% of the purchase price before paying off any financing, allowing you to get the needed equipment and start using it for the benefit of your business now.
Buy Your Small Business’ Home
By owning the space where your business operates, you can build equity while also starting to deduct annual interest paid on a small business real estate loan, which helps roll cash back into your business by generating revenue though renting extra space to tenants. Just make sure your business uses at least 51% of the space.
Even with higher interest rates right now, owning the property to generate cash flow and build equity can improve your business’ finances in the long term.
Consult with your banker and tax advisor to build out a plan to leverage tax season to enhance your business’ current strengths and structure.
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