With the end of the year quickly approaching, tax season is just around the corner. As an entrepreneuer, it’s crucial to plan ahead and explore all potential income tax deductions and credits. In this blog post, I will share five helpful strategies that can assist in maximizing your tax savings, enabling you to retain more of your hard-earned money.
Whether you’re a photographer, dog trainer, or any other small business owner, professional tax planning can aid in saving money and getting ready for the new year ahead!
In this post, our main objective is to equip you with effective tax planning strategies for reducing your taxable income. And why is that important? Simply put, less income means you could owe less in taxes, allowing you to keep more of your hard-earned profits. So, whether you’re just starting your small business journey or a seasoned pro, read on to discover some savvy tactics that could bring you significant tax savings. Let’s dive in!
Once you have minimized your income taxes by reducing your business income, there are many other ways to reduce your tax burden. Popular options include charitable contributions, retirement plan contributions, deducting medical expenses, state tax deductions, and other personal deductions and credits. While these strategies are not part of this post, they are great options to include in tax planning with your tax advisor.
The goal of tax planning is to minimize taxes legally. Depending on your specific tax situation, there are many tax strategies that can help you reduce taxes and maximize savings. Let’s take a look at the do’s and don’ts of tax planning:
Your tax strategies may change yearly, depending on your tax situation. In years that you have higher income and are in a higher tax bracket, you should work to maximize deductions and tax credits and defer income.
In years where you have lower income and are in a lower tax bracket, it may be beneficial to trigger income that was previously deferred. Additionally, if your adjusted gross income falls below a certain threshold, you might not owe any taxes at all.
It is important to understand the fundamental concepts of tax planning before implementing any strategies. Be sure to research topics such as tax brackets, deductions, credits, and income deferral before making any decisions.
If you have employees, you know how important it is to offer competitive pay and benefits. But did you know that boosting your team’s salaries can inadvertently contribute to an increase in employment tax expenses? The good news is you can get around this by offering tax-exempt fringe benefits.2
Choosing the right benefits for your team can make a significant difference. It’s essential to understand what your employees value most. This often involves open discussions to gain insights into their specific needs and preferences.
Once you have this information, you can align it with your business goals and budget constraints to decide on the suite of benefits to offer. Additionally, it’s a good idea to review specific plans with a tax professional before making any changes. They can help you understand the tax impact and guide you on structuring these benefits in the most tax-efficient way.
An accountable plan is a great tax planning option that allows you to deduct business expenses paid for by employees or business owners. An accountable plan is a plan that allows you to reimburse your employees or yourself for business expenses without incurring any additional taxes. These expenses include things like travel, meals, and lodging.
For partnerships and S-corporations, an accountable plan can be a game-changer. It allows these entities to reimburse partners or shareholders for out-of-pocket business expenses without these reimbursements being treated as taxable. This can significantly lower the partnership or S-corporation’s taxable income, thereby reducing the tax burden. Such a plan brings clarity, fairness, and tax efficiency to managing business expenses, creating a win-win situation for all involved.
Now, while setting up an accountable plan might sound like a breeze, it’s highly recommended to consult with a lawyer or Certified Public Accountant (CPA) for professional legal and tax advice. Why? Well, there’s a myriad of rules and regulations surrounding accountable plans, and navigating these can be tricky.
Missteps could lead to the plan being disqualified by the IRS, which would result in reimbursements becoming taxable. A seasoned professional can ensure your plan meets all IRS guidelines and is tailored specifically for your business needs. They can also keep you updated on any changes to tax laws that might affect your plan. In essence, getting legal and tax advice isn’t just an option – it’s a necessity for creating an effective, compliant, accountable plan.
Reimbursing employees for expenses they pay out of pocket isn’t just good business; it’s the right thing to do! Before the Tax Cuts and Jobs Act, employees could deduct unreimbursed employment expenses on their tax returns. Unfortunately, beginning in 2018, this deduction went away, leaving some employees to foot the bill.
By establishing an accountable plan, you can ensure that your employees are being reimbursed for their actual expenses and also save yourself some money on taxes. Make sure you have a written policy that outlines the rules for reimbursement, and keep detailed records of all receipts and expenses.
As we continue our journey through the landscape of tax planning strategies, the next topic we will delve into is the often-overlooked avenue of writing off bad debts. This could be an effective method to mitigate losses, and surprisingly, it could even generate some tax benefits for your business. So, let’s turn this potential downside into an upside!
Writing off bad debt reduces your income, potentially saving you a substantial amount on your taxes. If you have any customers or clients who have not paid their bills, consider this option.
However, remember that not all unpaid invoices qualify for a tax write-off. You must be able to demonstrate the debt is uncollectible by making a reasonable effort to collect the debt to qualify for this tax break. This doesn’t necessarily mean you have to exhaust all possible avenues to collect the debt.
It simply means that you’ve done your due diligence, and based on the debtor’s situation – perhaps they’ve declared bankruptcy, disappeared or flat-out refused to pay – you’ve determined it’s highly unlikely you’ll ever receive payment.
Investing in your business at the year-end could be a strategic move to reduce your taxable income. Section 179 of the IRS Tax Code provides a tax incentive for businesses to encourage them to invest in themselves. It allows you to deduct the full purchase price of qualifying equipment bought or financed during that tax year. This means if you buy a piece of qualifying equipment, you can deduct the FULL PURCHASE PRICE from your gross income. For small businesses, this could mean substantial tax savings!
However, before you rush out to make purchases, it’s critical to plan wisely. Don’t buy equipment just for the sake of tax deductions – it should align with your business strategy and truly add value to your operations. After all, a tax deduction only gives you a percentage of the cost back, not the entire cost. Therefore, these purchases should be planned and budgeted for.
Just remember that the equipment, software, or property must be used for business more than 50% of the time to qualify for the Section 179 Deduction. Also, the full amount of the equipment, software, or property must be deducted in the year of purchase.
Lastly, always consult with a tax advisor before making any large purchases to take advantage of tax deductions. They can help you navigate the complexities and ensure you stay within the legal boundaries.
As we wrap up our journey of tax planning, let’s shift gears slightly and talk about the timing of your year-end transactions. The end of the year is a crucial period in the fiscal calendar for many businesses, as it offers various opportunities to manage financial transactions to optimize tax benefits strategically. The timing of these transactions can greatly impact your overall tax situation. So, let’s dive in and understand how we can leverage this often overlooked yet potent tax planning strategy.
Credit cards can provide significant tax benefits for businesses, particularly when it comes to recognizing expenses and reaping rewards. When you use a credit card for business expenses, you can claim the expense in your tax return for the period the expense was incurred rather than when you pay off the credit card. This allows you to recognize and deduct expenses faster, potentially leading to tax savings.
The timing of your year-end transactions can also have a big impact on your taxes. For example, if you have any clients who owe you money, it may be wise to delay billing them until the new year. This can help you reduce your income for the current year and shift it to the following year.
This strategy works for accrual and cash basis taxpayers. However, it’s important to note that this strategy is only effective if you actually receive payment at the beginning of the new year – otherwise, it won’t have any impact on your taxes.
For S-corporations and partnerships, delaying distributions and bonuses until the new year can help reduce the current tax burden. The same is true for C-corporations – if they declare a dividend, it should be at least two months before the end of the tax year to ensure it’s not taxed in that year.
Again, always consult with a tax or financial advisor before shifting funds around. They can assess your specific situation and recommend the best strategy to manage your taxes.
Timing is not just crucial when it comes to sending invoices or paying bills; it also applies to making financial decisions like selling assets or making investments.
For instance, if you’re considering selling a business asset that has appreciated in value, it might be wise to delay the sale until the next tax year if you’ve already had a profitable year. This way, the income from the sale will be taxed in the next year, potentially lowering your tax liability for the current year.
On the other hand, if you’ve experienced some financial losses this year, it may make sense to sell a profitable asset in the same year to offset the losses. This is a strategy known as “tax loss harvesting,” and it can be an effective method of reducing your tax liability.
Remember, proper timing of these transactions requires a deep understanding of your current financial situation, future expectations and tax law. It’s recommended to seek advice from a tax advisor to make these decisions in a manner that’s most beneficial for your tax situation. They can guide you in balancing your business needs with potential tax advantages, ensuring that your year-end transactions are both strategic and compliant with tax laws.
Investing in your business at the year-end could be a strategic move to reduce your taxable income. Section 179 of the IRS Tax Code provides a tax incentive for businesses to encourage them to invest in themselves. It allows you to deduct the full purchase price of qualifying equipment bought or financed during that tax year. This means if you buy a piece of qualifying equipment, you can deduct the FULL PURCHASE PRICE from your gross income. For small businesses, this could mean substantial tax savings!
However, before you rush out to make purchases, it’s critical to plan wisely. Don’t buy equipment just for the sake of tax deductions – it should align with your business strategy and truly add value to your operations. After all, a tax deduction only gives you a percentage of the cost back, not the entire cost. Therefore, these purchases should be planned and budgeted for.
Year-end tax planning is an important task for small business owners. By reviewing your employee fringe benefits, establishing an accountable plan, writing off bad debt, making large year-end investments, and considering the timing of your year-end transactions, you can save money on your taxes and prepare for the new year.
If you don’t already have a CPA or you are looking for a new one, CenterFocus is accepting a limited number of clients in fall 2023. We’d be a good fit if you’re looking for a CPA who values following the rules, helps you make strategic financial decisions, and takes the time to understand your specific situation. Our team of seasoned professionals looks forward to serving you. Contact us today to get started!
In the meantime, review your finances and contact a qualified CPA if you need help understanding how the current tax codes apply to your business. Planning ahead will help you take advantage of all available deductions and put you in the best position for a successful tax season.
For more information, visit our blog to read articles on tax planning for small businesses. You’ll find advice from experienced CPAs on topics ranging from filing deadlines to tips for keeping accurate financial records. With this information, you can rest assured that your business is on track for a successful tax season.
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