The tax filing deadlines for small businesses in Michigan are just ahead, however, unless you are still trying to corral your tax documents and information for this year’s return, it’s important to think ahead to the tax planning moves you should consider making for 2024 and beyond. Doing so will ensure that you stay ahead of the curve of evolving tax laws with a proactive tax strategy that will help to optimize your small business tax situation.

To help you get started, here are 12 key tax optimization strategies which you can use to potentially reduce your Michigan small business taxes in 2024.

1. Reevaluate Your Michigan Business Entity

The legal structure of your business such as whether it is a sole proprietorship, partnership, corporation, or limited liability company (LLC) has significant implications on your business taxes. This is because each entity type is taxed differently, based on factors such as income, employment tax, and liability. 

As your business evolves and the tax environment shifts, revisiting your entity type can lead to significant savings. Check with a tax professional to consider the long-term tax responsibilities of each structure and how they align with your business goals.

2. Be Deliberate About Maximizing Deductions

Maximizing all potential tax deductions can significantly reduce your taxable income. As a small business owner in Michigan, common deductions include:

• Business expenses that are “ordinary and necessary” such as supplies, computer equipment, and phones used for work

• Home office deductions

• Travel and entertainment for business purposes

• Retirement and health savings plans contributions

• Interest on business loans

In addition to maximizing as many deductions as possible, be sure to keep detailed records for expense tracking in case you need to substantiate your deductions to the Michigan Department of Treasury or the Internal Revenue Service.

3.  Tap into Available Tax Credits 

Unlike deductions, which reduce your taxable income, tax credits directly lower your tax liability. Consider them dollar-for-dollar reductions. Research and understand the tax credits available to small businesses, including these ones:

• Research and Development (R&D) tax credit

• Work Opportunity Tax Credit (WOTC)

• Small business health care tax credit

Tax credits usually require specific activities to qualify. As such you need to make sure that your business’s operations align with any credit that you intend to claim.

4. Consider the R&D Tax Credit

Many businesses are eligible for the Research and Development Tax Credit,however it is easy to be confused about whether your specific business does. If your business develops new products, processes, or software,you should check with a tax professional to determine if you can take advantage of the R & D tax credit. 

5. Make the Most of Bonus Depreciation

If your business has a need to invest in capital assets, you should also consider it a tax strategy. Leveraging Section 179 and Bonus Depreciation will enable you to deduct the all (or at least a portion) of the cost of qualifying equipment and property in the year they are put into service, rather than depreciating them over time.

If you need help deciphering the rules and limitations of these provisions, and understanding how they impact business’s projected cash flow, check with a tax professional.

6. Create an Income and Expense Strategy

Do you consider the timing of when you receive income and pay expenses? If not, this may be an area to reconsider in terms of how it can impact your tax liability. One example is if you expect higher revenues in the next tax year,you may wish to defer some into the future, or accelerate expenses. This could mean prepaying vendor invoices or purchasing necessary equipment now. If you anticipate your income will be  lower this tax year, you’ll want to do the opposite and delay expenses while trying to accelerate income.

This income recognition and expense timing strategy, known as “tax bracket management,” can help even out your income and expense levels across multiple years and optimize your tax outcomes.

7. Leverage Tax-Advantaged Retirement Plans

Contributing to tax-advantaged retirement plans like solo 401(k)s or Simplified Employee Pension IRAs (SEP-IRAs) can benefit you and your employees. These contributions are generally tax-deductible and can lower your current tax bill while you save for your future.

As the owner of a small business the benefits that you can offer in the form of retirement plans are critical for your employees future security and current compensation packages. The good news is many of these plans can help defer taxes and be part of your tax optimization strategy.

8. Take Advantage of Section 179

Section 179 of the tax code allows businesses to deduct the full purchase price of qualifying equipment and software purchased or financed during the tax year. Consider this strategy if you are planning to invest in any significant equipment or purchases for your business this tax year. 

Use Savings Accounts (HSA) and Flexible Spending Accounts (FSA)

If your business does not provide employer-sponsored health benefits or you do not have health benefits yourself, contributing to an HSA or FSA can lower your taxable income and provide much-needed flexibility in covering healthcare costs. Especially for businesses without traditional employer-sponsored benefits, these accounts are a valuable tax planning tool.

9. Incorporate Tax-Loss Harvesting

If you have investment losses, consider offsetting any investment gains with those losses in order to potentially reduce your tax liability. In this case you must follow the IRS’s wash-sale rule, which prevents investors from taking the loss if you buy a substantially identical security within 30 days before or after the sale.

10. Plan for Succession and Estate Tax

Do you have a future plan for the sale, succession, or inheritance? All of these can trigger additional taxes. If you plan to sell your business or pass it down to your heirs, it is important to be aware of how estate taxes may impact your business. Having a strategic succession and estate plan can minimize the impact of these taxes, ensuring a smooth and cost-efficient transfer of your business. 

Offer Employee Benefits for Tax Optimization

Employee benefits are a crucial component of tax optimization for small businesses. Health insurance premiums, flexible spending accounts (FSAs), and adoption assistance programs can all be  tax-advantaged benefits for the employer and employees.

11. Contact McComb and Company to Optimize Your 2024 Michigan Small BusinessTaxes 

Developing a tax optimization strategy for your small business in Michigan is an ongoing process. Understanding all available tax optimization strategies and how they may impact your specific situation is critical. Tapping into the expertise of tax professionals familiar with the State of Michigan tax laws as well as all federal tax codes will ensure that all of your business tax obligations and compliance needs are considered as part of a comprehensive tax plan. 

Final words…

By being proactive about your business tax situation and taking advantage of all available tax strategies with the assurance of a professional tax planning partner to give you peace of mind about the decisions you are making, you will position your Michigan small business for success in 2024 and beyond. Need help? Contact the McComb & Company tax team for assistance.