Tax planning may not be the most exciting aspect of your business, but it is a very important one. Most entrepreneurs and small business owners only focus on taxes when it’s time to file their annual return. However, tax planning should be an ongoing part of your business.
The best strategy is to meet with your tax advisor during the mid-year off-season and look over your financial statements to estimate your potential tax liabilities. By doing this in the middle of the year, it can save you from any unexpected tax consequences when your return is due. No one wants to get caught owing the IRS more money than anticipated.
When you schedule that all-important meeting with your tax professional, consider bringing up these helpful tips so that you can work together to keep more money in your business, rather than in Uncle Sam’s pocket.
Understand the legal structure of your business.
The legal structure of your business can significantly impact your tax situation. Most small businesses start out as a sole proprietorship, but if your business has grown or is now netting $100,000 or more annually, you should consider incorporating.
Incorporation provides a number of tax benefits. One is the ability to deduct medical insurance premiums that you pay on behalf of the company.You can also deduct business losses from your income tax if the business isn’t doing well. However, incorporation isn’t without its drawbacks. There is obviously more paperwork and record keeping, and taking money from the business must be done through payroll instead of simple draws.
Be sure to discuss your company’s legal structure with your tax professional and attorney. It could end up saving you money in the long run while providing you peace of mind.
Provide yourself the benefit of a retirement plan.
Many entrepreneurs and small business owners put everything into their businesses and end up neglecting themselves. That may be necessary during the start-up phase of your business, but somewhere down the line it is important to think of your future personal needs. If your business is finally in the black, take out some money and put it towards your retirement fund. The best part is it is tax deductible.
Consult with your financial advisor for the best retirement plan option. Self-employed business owners are no longer limited to just a SEP IRA. There are other options available, not only for you, but for your workers as well. If you decide to offer a retirement plan for employees, you may be able to provide raises for them without paying additional employer-paid payroll taxes. Check IRS Publication 560 for more information. Also be sure to discuss this with your tax professional as well.
Purchase capital assets, namely furniture and equipment.
Is your business in need of a few big-ticket items? Perhaps you need office furniture, new computers or some specialized equipment. Don’t frown upon these capital outlays. The IRS allows deductions for these capital assets under the Section 179 Deduction. This is a special deduction that allows you to depreciate the entire cost of these items in one year, rather than to depreciate them over their lifetime. Unfortunately, in 2014 Congress reduced the threshold amount to $25,000, but there is a possibility that lawmakers will raise that ceiling.
Provide benefits for your employees.
In addition to capital items, employees are considered a business asset as well. As a small business owner, it is important to provide benefits to your workers. Although wages are crucial, you shouldn’t neglect fringe benefits. There are many fringe benefits available that are non-taxable for both employer and employee. They are detailed in IRS Publication 15-B. By consulting this publication, you may uncover some benefits that boost your employees’ morale while saving you valuable tax dollars.
Make some good financial projections.
Finally, help your tax professional help you by making some financial projections. Dig out those financial statements and run a profit and loss comparison. Compare this year’s business to last year’s. Are there any major changes? Perhaps a product took off, and you made more money this year compared to last. This situation will definitely impact your tax liability. Play with the numbers and try to estimate what the bottom line will be for the current year. Bring your projections to your tax advisor to see if any adjustments to your estimated tax payments are needed.
Taking advantage of these tax-planning tips ahead of time can save you money that can be put to better business use.
If you own a small business and could use some help with tax planning, contact Acceler8. We are your small business advisors. We offer tax, accounting, and business advice, so get in touch with Acceler8 to learn more today.