As the end of the year approaches, Shopify store owners have a unique opportunity to take proactive steps that can reduce their tax liabilities and set the stage for financial success in the coming year. Implementing these year-end tax strategies now will help you retain more of your hard-earned profits, reduce taxable income, and position your business for growth.
In this guide, we’ll explore some essential tax strategies specifically designed for eCommerce entrepreneurs, including maximizing deductions, deferring income, and prepaying expenses. Let’s dive in!
Why Year-End Tax Planning Matters
Proper year-end tax planning allows Shopify store owners to reduce taxable income, take advantage of key deductions, and strategically plan for future growth. For example, by reducing your taxable income by $50,000 through deductions, at a tax rate of 24%, you could save $12,000 immediately. That savings can be reinvested into your business to drive growth, whether through inventory purchases, marketing campaigns, or hiring new talent.
1. Section 179 Deductions: Invest in Equipment
The Section 179 deduction allows you to deduct the full cost of qualifying equipment or software purchased for your business before the year ends. For 2023, the deduction limit is $1.16 million. This is a great opportunity for Shopify store owners who need to upgrade systems, such as warehouse machinery or eCommerce software, without waiting years to depreciate the asset.
Example: If you invest $50,000 in new inventory management software, Section 179 lets you deduct the full amount, saving you $12,000 in taxes (at a 24% tax rate).
Strategically, investing in equipment now not only provides tax savings but can also enhance your store's efficiency, boosting your sales in the upcoming year.
2. Defer Income to Next Year
If you’re expecting a large payment in December, consider deferring it until January to push the tax liability into next year. This move is especially helpful if you’re nearing the edge of a higher tax bracket. By keeping your 2023 income lower, you can avoid moving into a more expensive tax bracket and instead deal with the income in 2024 when you might have more deductions available.
Example: Suppose you’re set to receive a $100,000 payment in late December. By deferring it until January, you might avoid crossing into the higher 32% tax bracket, potentially saving you thousands of dollars.
3. Prepay Business Expenses
By prepaying certain expenses like rent, advertising, or utilities, you can take a deduction this year, reducing your taxable income. This is particularly beneficial for Shopify store owners who know they will incur these costs in the first quarter of next year.
Example: If you prepay three months of rent for $15,000 in December, you could deduct that amount from your 2023 taxes, saving approximately $3,600 (assuming a 24% tax bracket).
4. Make Contributions to Retirement Plans
Contributing to a Solo 401(k) or SEP IRA is one of the best long-term strategies to reduce taxable income while securing your financial future. For 2023, you can contribute up to $66,000 in a SEP IRA or $22,500 in a Solo 401(k).
Example: If your taxable income is $250,000, contributing $50,000 to a SEP IRA reduces your taxable income to $200,000, potentially saving you $12,000 in taxes at a 24% rate.
5. Write Off Bad Debts
If a customer owes you money and it’s clear that the debt is uncollectible, you can write off the amount as a business loss, reducing your taxable income.
Example: Let’s say a customer owes you $7,000 but hasn’t paid. Writing off that debt could reduce your taxable income and save you $1,680 in taxes (at a 24% rate).
6. Take Advantage of the Qualified Business Income (QBI) Deduction
Shopify store owners operating as a pass-through entity may qualify for the Qualified Business Income (QBI) deduction, allowing you to deduct up to 20% of your qualified business income. However, this deduction has income thresholds, so it’s important to manage your taxable income carefully to maximize this benefit.
Example: If you have $100,000 in qualified business income, you could deduct $20,000 under the QBI deduction, saving $4,800 in taxes at a 24% rate.
Final Tax Strategy Tips
Consider donating to charity for additional tax deductions.
Ensure you’re tracking all business expenses thoroughly, so you don’t miss out on any deductions.
Review last year’s tax return to identify any missed opportunities that could apply to this year’s tax planning.
Conclusion:
If you have any questions or need personalized help, don’t hesitate to reach out. Schedule a call with Jacob by going to https://www.jacobcurtiscpa.com/5-strategies-calendar. We're here to help you piece together financial freedom.
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