5. See whether pass-through entity status could help reduce your taxes
Many states have enacted pass-through entity (PTE) taxes as an IRS-approved work-around to the $10,000 limitation on state and local tax deductions.1 Here’s an example of how it can work: If an S corporation has $100,000 worth of income and the ultimate state tax is $11,000, that amount is considered an expense, so that the S corporation’s income for federal tax purposes becomes $89,000. Thus, the business owners were able to receive a tax deduction and ultimately paid less federal taxes due to the PTE benefit. Ask your tax professional whether your state has a PTE provision.2
6. Set up — or add to — a retirement savings plan
Small business owners generally have several options for employer-sponsored retirement savings plans, including SIMPLE IRA, SEP IRA, 401(k), and profit-sharing plans. The plans differ in the amount the employer and employee can contribute, the investment options available, and the ease and expense of setting them up, among other factors. Small business owners may also set up personal IRAs for themselves.
With any plan, contributions you make for yourself and your employees may be tax-deductible. Small businesses may also get a tax credit to help defray the cost of starting certain retirement plans. For calendar year taxpayers, you generally have until the due date, including extensions, of the small business’s tax return to contribute funds to a retirement plan. But some types of plans must be established before the end of this year, or earlier during this year, to get the tax deduction. Ask your tax advisor. To learn how much you can contribute to your retirement plan, refer to our annual contribution limits guide.
7. Consider equipment deductions and green energy tax credits
If you buy new or used equipment for your company and place it in service before December 31, 2022, you could be entitled to a federal income tax deduction for 2022. As the law currently stands, the benefit still exists for future years, adjusted for inflation. Because the deductions are intended for small businesses, they start to phase out at spending amounts starting at $2.7 million, ending at $3.78 million. When planning a purchase, consider your timing carefully, Navani advises. “If you’ve had a challenging year financially and envision better results in the year to come, you might consider holding off that purchase until the start of the year, giving yourself a potential deduction for next year, when your tax bill could be higher.”
Now may also be a time to consider green improvements for your business. The federal Inflation Reduction Act, signed into law in August 2022, includes nearly $400 billion for clean energy tax credits and other provisions aimed at combating climate change. These include potentially thousands of dollars in tax credits for buying new or used electric or hybrid clean vehicles, installing residential energy property, and other steps. Restrictions apply, so check with your tax advisor on which credits might be available to you, Navani suggests.