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Success for small businesses often hinges on maximizing revenue and minimizing costs. The result is typically greater profitability and financial stability. However, knowing where to reduce costs for the best effect is crucial and not always straightforward. Invariably one of the best places to begin is with your tax planning strategy.

I’m a Brooklyn-based New York Bar Association member, attorney at law, and certified public accountant. My team and I specialize in taxation advisory, preparation, and representation. Now more than ever, clients are coming to us week in and week out for effective strategies to minimize the tax burden on their businesses.

Particularly for smaller business owners, a great place to start is with a closer look at adjusted gross income and tax deductions.

Adjusted Gross Income and Tax Deductions

Minimizing your small business tax burden should always start with a closer look at your adjusted gross income. A lesser adjusted gross income keeps you and your business in a lower tax bracket. There are several ways to lower your adjusted gross income. In almost all cases, the benefits are plentiful.

Doing so allows for various tax deductions. Lowering your adjusted gross income can also see you reap the rewards of any tax credits you’re entitled to. Moreover, the same measures can help cut or eliminate numerous additional and potentially unnecessary taxes. As a business owner, just one example is the costly Medicare surtax.

Start with your personal tax returns and itemized deductions. Some potential itemized deductions available to small business owners are charitable donations, health saving account contributions, and any relevant property taxes.

Tax-Exempt Employee Fringe Benefit Plans

Employee wages are at an all-time high in the United States in 2023. With that comes an additional tax burden on businesses of all shapes and sizes. However, it’s a burden that’s often felt the hardest by smaller companies.

As wages increase, so do your tax costs as an employer. Yet, that needn’t necessarily be the case with the right tax planning strategies. Take tax-exempt employee fringe benefits, for example. Tax-exempt employee fringe benefits can be an excellent way to reduce the tax burden on your small business.

Ideally, include one or more fringe benefits as a part of the compensation package offered to your staff. Popular options among many small business owners are childcare assistance and travel expense reimbursements. You may also wish to look into group life and medical insurance as another form of tax-exempt employee fringe benefit, especially as your business grows.

Carrying Over Any Missed Tax Savings

With adjusted gross income, tax deductions, and employee fringe benefits accounted for, there’s another factor to consider: carrying over any missed tax savings. In any given year, you may find that you’ve been unable to benefit from some or all of the tax savings or credits you’re entitled to.

Where that’s the case, you may be able to carry them forward, benefiting from missed deductions, credits, or other savings during the following tax year. Start by checking for any potential savings you missed last year, beginning with general business credits and things like home office deductions.

Deferring Taxable Small Business Income

As your small business grows, so, hopefully, does your revenue and, unfortunately, tax liability, which is why tax planning is so important, especially in the earlier stages of a new business’s life. One massively beneficial tax planning strategy to minimize the tax burden on smaller operations involves deferring a portion of your income.

Of course, this tax planning strategy doesn’t eliminate what you owe. Instead, it simply minimizes the tax burden in a particular year. The idea is to defer a portion of your taxable income into a future year or years. That leaves you free to grow, saving money in the shorter term with a view to settling any deferred taxes in the near future.

Remember, opportunities exist to minimize your tax burden year-round, from adjusted gross income and tax deductions to deferring current earnings. As a small business owner, it’s imperative that you keep this in mind throughout the year and not just during tax season.

Utilizing Proper Business Structures

Are you using the most appropriate entity structure for your specific business? It may seem obvious, but many companies continue to operate using entities that are not optimal. Using the wrong one can significantly reduce the tax efficiency of your small business. So, it’s always advisable to double-check. The most common business or entity structures include:

• Limited liability company
• Partnership
• S Corporation
• Sole proprietor

Each of these business structures comes with positives and negatives. However, if a small business owner uses the wrong entity type, the adverse tax efficiency implications can see the negatives very quickly outweigh the positives. If unsure, speak to a tax professional or refer to the U.S. government’s official Internal Revenue Service website.

Avoid Unnecessary Audit Surprises

The most significant tax burdens are often those that you aren’t expecting. These surprises from the Internal Revenue Service usually follow a tax audit. To reduce the risk of owing any additional taxes, you should always avoid any unnecessary audit surprises in the first place.

Three of the most common causes for businesses owing additional taxes after an audit are miscellaneous deductions, estimated business mileage, and incorrectly classified employees. These are frequently the result of trying to simplify or save time on accounting. Unfortunately, they can all result in unexpectedly owing more tax than you had anticipated.

Thankfully, you can easily safeguard against each of the above three examples. To avoid this trio of unnecessary audit surprises, classify any deductions accurately, only using categories like “other” or “miscellaneous” sparingly. At the same time, precisely calculate your mileage rather than estimating between your business and other driving.

Lastly, ensure that each of your employees is correctly classified. Don’t list workers as, for example, independent contractors unless they are. Wrongly classifying employees can result in significant back taxes and other penalties – a major additional burden for any small business.

Co-author: Owolabi Salis

Owolabi M Salis is an award-winning attorney and certified public accountant based in Brooklyn, New York. His expertise includes Contract disputes corporate services, drafting and lawsuits, immigration advisory and application, private wealth advisory, taxation advisory and preparation, taxation representation, and more.