How to Save Your Business Money During Tax Season
We’re guessing you started your business because you have a passion for something. And, unless you’re a CPA or Tax Attorney that specializes in tax planning, we’re guessing that you are always willing to learn about potential entirely above-board tax savings opportunities.
Running a small business can be stressful enough day to day, but as tax day approaches, the stress probably rachets up several times, especially if you have not done any tax planning during the year.
We’ve put together a list of 12 things you can do throughout the year to save your business money, especially while heading into tax season.
Be Diligent With Your Paperwork
By tracking your expenses and receipts daily, you’ll stand a better chance of being able to claim all of the deductions you deserve at tax time and moreover minimizing the potential financial damages in any subsequent tax audit where you must prove your claimed tax deductions or lose them. If you put off tracking your expenses until you start calculating your taxes in March or April, it’s going to be difficult to remember the exact reason for each expense from nearly a year ago, say like from January and February. Good record keeping is one of the most important things your business can do on a daily basis when it comes to saving money on your taxes.
Research the Tax Business and Personal Tax Credits that are Available to You
You may be surprised to learn that federal, state, and local governments regularly offer tax credits to businesses that meet a number of criteria. Unlike deductions, credits offset your tax liability on a dollar for dollar basis and can even be partially or wholly refundable to you. Many credits are not readily apparent on the typical tax forms you routinely file. Instead, you may have to seek them out. Credits are awarded for things like:
· Creating jobs
· Spending money on research
· Making changes aimed at increasing energy efficiency
· Opening new offices in rural areas
· Purchasing electric vehicles
You will have to do some research to locate and exploit many of these tax credits, and you may have to apply and receive approval before taking the credit on an entity or personal tax return. But credits are often lucrative for the right business or personal situation.
Delaying Cash Receipts and Accelerating Deductions:
No, we’re not taking about anything illegal. Instead, try delaying accepting cash receipts until after Dec. 31, so the income will become part of the following year’s tax bill.
Along those same lines, if you have deductible expenses that you plan to take in the first week of January, consider accelerating that spending so it occurs in the final week of December instead. You then can take those deductions in the current year tax bill.
Consider Using Section 179 and Bonus Depreciation
When you purchase equipment for your business, you typically will write off the expense as a deprecation allowance over several years.
However, if you’d like to take a bigger deduction immediately for the equipment, Section 179 and Bonus Depreciation allows for this. With Section 179 and Bonus Depreciation, you’re allowed to accelerate the depreciation, taking all of it in one year instead of over several years. You have to meet certain conditions to take a Section 179 or Bonus Depreciation deduction, however.
Personal Vehicle Expenses
A small business owner may drive his or her vehicle for business use during the day and personal use at night. You’re allowed to write off the business use of the vehicle, using one of two methods.
· Standard mileage rate. After you determine how many miles you drove the vehicle for business purposes, the IRS allows you to calculate your business deduction using a standard rate per mile. This is the easiest option.
· Actual expenses. You can record your actual costs for fuel and maintenance of the vehicle. But you then must calculate your percentage of business use and of personal use for the vehicle to use this method. If your business use of a vehicle is let’s say 30%, you then deduct 30% of the actual vehicle expenses and 30% of the available depreciation.
· Note: Either method requires that you keep a contemporaneous mileage log or risk losing the deduction in a subsequent audit.
If you keep good records and have the time, you can calculate both methods and determine which one saves your business more money during tax season.
Personal Home Office Expenses
If you run your small business from your home, and you have a specific place in the home where you do solely business (no personal use allowed), you can take a home office deduction for that percentage of your home on your taxes. You must not have an office outside the home available to you and many tax practitioners consider this deduction a bit of a red flag. You do not need to own your home to claim this deduction.
The IRS has made calculating the deduction on a home office much simpler in the past couple of years. But you do have to be able to prove that this space is used exclusively for your home office. Please understand that claiming a home office deduction may create a greater chance of having your tax return audited.
Make Use of an Accountable Employee Reimbursement Plan
If you have employees, and you must reimburse them for using their personal vehicle for the business, you can set up a system to reimburse them separately from their pay on a tax-free basis. This means the employee doesn’t have to pay tax on the reimbursement amount. With the loss of itemized deductions mandated as part of the 2017 tax act, employees will truly appreciate and financially benefit from this arrangement, which should translate into employee loyalty.
With the accountable plan in place, your business doesn’t have to account for the reimbursement as part of the company’s payroll tax cycle which keeps employee and employer payroll taxes away from the tax collector. Read through IRS Publication 463 for more information on setting up this type of plan.
Contribute to Retirement Accounts
As the small business owner, you can protect some of your income from the tax collector by contributing to a company retirement plan. Tax payments on these contributions are deferred, usually until you retire.
Creatively Give Employees Raises
Again, nothing illegal here. But rather than giving your employees raises in salary alone – on which he or she must pay income tax and you as a business must pay increased payroll tax – consider giving your employees an increase in their health insurance contribution on behalf of the business.
No employer or employee payroll taxes must be paid on this contribution, leaving more money in the pockets of both the employees and the business owner. Note: You must treat all employees the same and cannot offer them a choice between additional benefits or additional salary.
Write Off Bad Debts
Before calculating your taxes, take a look at your accounts receivable. If you have been carrying some bad accounts or obsolete inventory for a while, and it’s pretty clear you won’t receive payment for any of it, you can choose to write it off on your current year tax form. By deducting this amount from your current income, you’ll reduce your income and owe less in taxes.
Pay Attention to Any Tax Law Changes
Tax laws change more frequently you may think, especially regarding small businesses. If you based your entire year’s tax strategy on a law that changed back on Jan. 1, you’re probably going to cost yourself some money. If you have trouble understanding changes in tax laws, a tax attorney can help you decipher the changes and how they affect your business.
Adjust Your Small Business Structure
Sometimes, you can lower your tax bill simply by changing the way your small business is structured from a legal standpoint. You can select from any of five business structures under U.S. tax law.
· Sole proprietorship
· S Corporation
Depending on how you run your business and the number of employees you have, some of these structures will be more beneficial to you than others for tax purposes. They may help you with business succession planning too.
But some structures are more challenging to legally operate than others. If you find your options confusing, a tax attorney can provide the advice you need in this area.
Want to figure out how to use the best tax planning strategy to save your business money during tax season? Contact us at the Tax Law Offices of David W. Klasing, P.C. and let our tax pros help you figure out the best structure for your business with regards to your individual tax situation.