Was your photo booth rental business a part of the 5.4 million new businesses created during 2021? Starting a photo booth rental business can provide you with a wide variety of benefits, from flexibility in your day-to-day schedule to creating a stable career. However, new and existing photo booth rental businesses are subject to taxes, calling on the need for effective tax planning strategies to reduce your tax burden at the end of each year.
Utilize Section 179 Deduction
At the most basic level, your photo booth rental business needs assets to generate income. The IRS understands that purchasing new equipment can be a burden, regardless of business size, which is why the Section 179 Deduction is in place. Generally, you are required to depreciate an asset over the useful life, which can vary from 3 to 15 years; however, by claiming the Section 179 Deduction, you can expense the entire cost of the asset in year it was placed in service. The item needs to be purchased and placed in service before year-end, so contact RevoSpin ahead of time to secure your new piece of equipment and enjoy the tax benefits.
Evaluate Your Accounting Method
Many small businesses tend to start out on a cash basis method of accounting, making it important to evaluate the tax benefits of switching to accrual. Cash basis photo booth rental businesses are commonly seen for Sole Proprietorship and Single-Member LLC taxpayers that report income on Schedule C of the 1040. Income and expenses are only recognized when cash is received or paid, limiting your tax planning opportunities. On the other hand, an accrual basis of accounting allows your business to accrue certain expenses, adding more flexibility to reporting the timing of income and expenses. The accounting method change can be requested when the annual business tax return is filed.
Consider a Salary Vs Distribution
As a business owner, you are faced with many decisions that affect taxable income, one of which is deciding on a salary versus a distribution. When taking a salary from your business, you will get paid like any other employee with payroll taxes being taken out. On the contrary, a distribution is not subject to payroll taxes, but reduces your basis in the company, which can result in a larger gain if you ever sell your business. Distributions are also not a qualified business expense, while both the salary and employer payroll taxes are. Taking a salary can result in a lower taxable income threshold, which saves you money on the amount of taxes owed from business income. Many photo booth rental business owners find the most value from taking both a salary and distribution, making it important to weigh each option for tax planning purposes.
Time Income and Expenses
Properly timing income and expenses is also another tax planning strategy that photo booth rental businesses can implement. Tax rates can vary from each year at the individual and business level, resulting in tax planning opportunities. If you notice income tax rates decreasing in the next year, consider purchasing that new RevoSpin asset in the current year to lower your tax burden or defer income to the next year. Cash basis taxpayers will have less opportunities for income deferrals based on when cash is received. Nevertheless, both cash and accrual basis businesses can analyze their upcoming expenses to maximize tax savings.
Take Advantage of Credits and Deductions
There is a plethora of credits and deductions available for business owners that reduce the tax burden. At the business level, payroll tax credits and general business deductions reduce the income taxed or passed down to the shareholders. If your photo booth rental business is set up as a Sole Proprietorship, Limited Liability Company, Partnership or S-Corporation, you will report and pay any corresponding taxes on your personal tax return. This opens the door to the Qualified Business Income Deduction, which subtracts 20% of the taxable business income out. This is a huge tax saving opportunity that should not be overlooked. In addition, taking this deduction into consideration can reduce quarterly estimated tax payments you are required to pay.
Understand Tax Reform Changes
Tax planning strategies for your photo booth rental business rely on having a full understanding of tax reform changes. The IRS offers QuickAlerts that notify you of any recently passed regulations, allowing you to stay in the loop of changes that affect your business. One recent legislation change that can be a great tax planning strategy is paying taxes at the entity level. The businesses that pass-through business income generally pay both federal and state taxes at the individual level. However, recent changes now allow businesses to pay certain state income taxes at the business level. Not only will you not be taxed on any business income on your state return, but the taxes paid qualify for a business deduction on the federal business return, creating a beneficial situation. Currently, 15 states are allowing the entity level deduction with more predicted to follow (CLA). The business state estimated tax payments need to be made before year-end so be sure to add this tax planning strategy to your list.
Both small and large photo booth rental business owners can benefit from accurate and effective tax planning strategies. The extra money put back into your pocket each year can be used to grow your business. One strategy for effective business growth is adding new revenue streams and reinvesting in more efficient equipment. RevoSpin helps businesses achieve both of these goals through their top-of-the-line photo booth equipment options. From innovative 360 photo booths to creative props and accessories, RevoSpin can help you take your photo booth rental business to the next level all while saving money on your next tax bill. Reach out to one of our team members today for more information.