Maximizing Tax Savings with the 163j Small Business Exception: Tips and Strategies

Maximizing Tax Savings with the 163j Small Business Exception: Tips and Strategies

Small businesses often struggle to keep their operating costs low, especially when it comes to taxes. However, there is a little-known tax exception available to small businesses that can help them save money. This exception, known as the 163j small business exception, allows small businesses to deduct a portion of their business interest expenses from their taxes. In this article, we will discuss tips and strategies for maximizing tax savings with the 163j small business exception.

Understanding the 163j Small Business Exception

The 163j small business exception is aimed at helping small businesses that have less than $26 million in gross receipts. Under this exception, small businesses can deduct business interest expenses up to 30% of their adjusted taxable income. The remaining interest expenses can be carried forward to future years. This exception is beneficial for small businesses because they can lower their tax bills and have more money to invest in their operations.

Tips for Maximizing Tax Savings with the 163j Small Business Exception

1. Consider restructuring your business: If your business is structured as a sole proprietorship or partnership, you might consider restructuring it as a C-corporation. This is because C-corporations are subject to a lower tax rate and can deduct all of their business interest expenses under the 163j exception. However, the decision to restructure should be made after consulting with a tax professional.

2. Optimize your tax timing: Small businesses can also maximize tax savings by timing their deductions and income to optimize their tax bracket. For example, if your business has a low-income year, you might consider delaying deductions until the following year when you expect a higher income. Similarly, if you expect a higher income year, you should consider accelerating deductions.

3. Monitor your interest expenses: Small businesses should always monitor their interest expenses to avoid going over the 30% limit. Going over this limit can result in disallowed deductions and higher tax bills. Therefore, it is essential to have a clear understanding of your interest expenses and actively manage these expenses.

4. Make an election to increase your 163j deduction: Finally, small businesses can elect to increase their 163j deduction. Under the CARES Act, small businesses can elect to use their tax year 2019 adjusted taxable income to calculate their 2020 163j limitation. This can help small businesses that have seen a drop in revenue due to the COVID-19 pandemic.

Conclusion

The 163j small business exception is a powerful tool for small businesses to lower their tax bills and keep their operating costs low. By following these tips and strategies, small businesses can maximize their tax savings and invest more money in their operations. However, it is essential to consult with a tax professional before making any major tax-related decisions to ensure compliance with the law and avoid any unnecessary penalties.