Top Tax Planning Strategies for Small Business Owners in Texas for 2024

As a small business owner in Texas, preparing for tax season means more than just meeting deadlines; it’s an opportunity to strategize, reduce liabilities, and keep more of your hard-earned profits. With recent tax law changes and unique considerations for Texas businesses, there are several steps you can take to optimize your tax position in 2024. Here’s a look at some practical tax planning strategies tailored to Texas entrepreneurs that can help you manage taxable income, maximize deductions, and make the most of your retirement savings.

1. Take Advantage of the Texas Business-Friendly Tax Structure

Unlike many states, Texas does not impose a personal income tax, which can be a significant advantage for business owners. However, Texas does have a state franchise tax, also known as the Texas Margin Tax, which applies to businesses with annual revenues above $2.47 million. While many small businesses may fall under this threshold, those with revenues approaching or exceeding it should work closely with an advisor to determine the best way to report and minimize taxable margins.

Essential Tip: Calculate your franchise tax liability early in the year to see if you can leverage allowable deductions or restructure business activities to reduce your taxable margin. For example, you might explore eligible cost-of-goods-sold or compensation-related deductions to help reduce your taxable amount.

2. Leverage Section 179 and Bonus Depreciation for Equipment Investments

If your business plans to purchase equipment, machinery, or other significant assets in 2024, consider using Section 179 and bonus depreciation to offset costs. Section 179 allows you to potentially deduct the full purchase price of qualifying equipment or software in the year you place it into service, instead of depreciating the asset over several years.

For 2024, the Section 179 deduction limit remains high, making it a powerful tool for reducing taxable income. Additionally, bonus depreciation allows you to deduct a significant portion of the cost of certain assets in the first year, which can be advantageous for businesses making substantial capital investments.

Key Tip: Plan equipment purchases strategically. For example, if you foresee high profits in 2024, front-loading purchases to take advantage of these deductions can reduce taxable income, whereas delaying them to a lower-income year may reduce your potential savings. But make sure to discuss any large purchases with your tax advisor before you buy so you can make sure you will get the deduction in the current year.

3. Maximize Retirement Contributions

Setting up a retirement plan helps with long-term financial planning and provides substantial tax benefits. Business owners in Texas can benefit from several retirement plans, each with its tax advantages:

1. Solo 401(k): Ideal for sole proprietors or single-member LLCs with no employees, allowing contributions of up to $22,500 (or $30,000 if you’re over 50) for 2024, plus an employer contribution component.
2. SEP IRA: This plan allows employers to contribute up to 25% of each employee’s compensation, up to $69,000 in 2024. It’s a flexible option, particularly for businesses with fluctuating income, as contributions are not mandatory each year.
3. SIMPLE IRA: For businesses with 100 or fewer employees, this plan offers a more straightforward setup with contributions up to $16,000 ($19,500 for those over 50).

Key Tip: Contributing to a retirement plan can significantly reduce your taxable income, especially in high-earning years. Consider maximizing your contributions to your retirement account and that of your employees to take advantage of tax benefits while also enhancing your business’s appeal as an employer.

4. Optimize Business Structure for Tax Efficiency

Choosing the right business structure is crucial for minimizing tax liabilities. While Texas is favorable in terms of no personal income tax, the tax implications of being a sole proprietorship, LLC, S-Corporation, or C-Corporation vary widely at the federal level.

For example:

• S-Corporations allow business income to pass through to the owner’s personal tax return, which can reduce self-employment taxes.
• LLCs offer flexibility, as they can choose to be taxed as sole proprietorships, partnerships, or corporations, depending on what’s most advantageous for the owners.

Key Tip: Reevaluate your business structure annually with a tax advisor. If your business has grown, it might be time to consider converting to a different structure, like an S-Corp, to optimize tax treatment on business income.

5. Manage Your Taxable Income with Timing Strategies

Depending on the accounting method required on your tax return, temporarily shifting income or expenses between tax years by controlling the timing of your income and expenses can save tax. Known as income deferral, this strategy can be beneficial if you anticipate being in a lower tax bracket in the coming year.

Examples of income deferral include:

Delaying client billing until late in the year to defer income into the next tax year.

Accelerating expenses by stocking up on office supplies or prepaying for services or inventory to increase deductions in the current tax year.

Key Tip: Work with a tax advisor to evaluate whether deferring income or accelerating expenses makes sense. Effective timing can help smooth out taxable income across years and reduce your overall tax burden. But you must be careful not to create artificial income or losses and by doing so, break tax laws. Before doing any timing strategies, consult with your tax advisor.

6. Stay Informed on New Tax Credits and Deduction Opportunities

The IRS regularly updates tax credits and deductions that small businesses can claim. For example, tax credits such as the Work Opportunity Tax Credit (WOTC) for hiring certain employees and the research and development credit (subject to limitations) can offer substantial tax savings.

For Texas businesses, investing in energy-efficient improvements or making upgrades that qualify for deductions can also be beneficial. Additionally, small business owners may be eligible for the Qualified Business Income (QBI) Deduction, which allows certain business owners to deduct up to 20% of their qualified business income.

Key Tip: Research tax credits available specifically to your industry or business activities and consult with a tax advisor to see if any new credits for 2024 apply to your business operations.

7. Keep Detailed Records and Review Quarterly

Effective tax planning requires meticulous record-keeping. Organizing and tracking expenses, income, and deductions throughout the year can avoid last-minute scrambles leading to missed deductions and potential penalties. Set up a process for reviewing your financials quarterly to identify potential tax-saving opportunities and monitor your business’s financial health.

Key Tip: Use accounting software to streamline record-keeping and work with an accountant to review your finances regularly. Many businesses in Texas use quarterly reviews to ensure they’re on track with estimated tax payments and to make adjustments for any significant changes in revenue or expenses.

Final Thoughts

Small business tax planning in Texas has its own benefits and challenges. By leveraging the unique advantages of the Texas tax structure and implementing innovative strategies, you can reduce your tax burden and keep more of your business income. Stay informed on tax law updates, maximize your deductions, and make the most of available credits to set your business up for financial success in 2024.

Working closely with a qualified tax advisor who understands Texas tax laws and small business needs is the best way to ensure you take full advantage of every tax-saving opportunity. You can start year-end planning now and remember these strategies to make 2024 your most tax-efficient year yet.