Now that tax season behind us, it’s a great time to reevaluate how you can minimize your company’s tax liability for the future. Have you evaluated your company’s current financial performance lately? By doing so, you can adjust your tax strategy accordingly and take advantage of different ways to adjust your tax position. Stop trying to piece things together at year-end and stay on top of different deductions all year long, so you don’t miss it! Consider whether these Tips for Tax Reduction in Businesses below could help.
1. Retirement Plan Contributions
Not only is this a great deduction for your business, but it’s also a great way to attract quality employees to your company. Small business owners have several options for employer-sponsored retirement savings plans. These include SIMPLE IRA’s, SEP IRA’s, 401(k)’s and profit-sharing plans. All these plans can differ in eligibility requirements, the amount the employer and employee can contribute, the investment options available and the expense of setting them up.
But contributions you make for yourself, and your employees may be tax-deductible as a business expense. You may also get a tax credit to help defray the cost of starting the retirement plans. This can be a great way to gain a current tax deduction, while also building up tax-deferred income for retirement! Always make sure to consult your tax advisor on the best options for your specific business.
2. Hire Family Members
The IRS allows for a variety of options to reduce taxes for your small business when it comes to hiring a family member. So, investigate who may need a job and where you could use a helping hand! You can hire your children, spouse, or even your parents. This is a practical way to reduce your business’s taxable income, while also allowing family members to gain work experience while contributing to the business’s success. Just note per IRS rules, family members must do legitimate work and receive fair wages. But these wages will be a deductible business expense, which will lower the amount of income subject to taxes.
If you have a sole proprietorship, you can hire your spouse, whose income will be subject to federal income tax and FICA taxes for Social Security and Medicare. But you would not have to pay unemployment tax if they are a legitimate employee and not a partner in the business.
Note that how your children will be taxed will depend on their age. All children will be subject to federal income tax on their wages, but kids under 18 aren’t subject to FICA taxes. Children under 21 are also not subject to Federal Unemployment Tax (FUTA), as well. Therefore, you would not have to pay FICA or FUTA tax. You can also start a retirement account for them, which will give them a big jump on building a sizable fund for their retirement. You can deduct employer contributions made, too!
3. Home Office Deductions
These days, almost everyone has a home office, or at least a little corner of the home that they do some business work from. Did you know that you may be able to deduct a portion of your housing expenses against your business income? You just need to make sure you can meet these two criteria:
- Regular and Exclusive Use – This simply means you must regularly use your home office exclusively for conducting business activities. No, your kitchen table that doubles as a desk won’t work. While you don’t need to dedicate an entire room to your business, you do need to make sure the work area has clearly identifiable boundaries.
- Principal Place of Business – This ensures that you spend the most time and conduct important business activities there.
4. Defer Revenue Recognition, Accelerate Expenses and Carry-Forward Unused Deductions
- Defer Revenue Recognition – Has it been a strong year? If you expect profits to be high this year, consider deferring revenue recognition to the following year. This can only be done if your business operates on a cash basis for tax purposes. It’s also particularly effective if you anticipate being in a lower tax bracket in the coming year. This will help to potentially lower your current tax bill and is beneficial for businesses experiencing fluctuating income or anticipating changes in tax rates.
- Accelerate Expenses – In addition to deferring revenue, work to increase this year’s expenses by paying some of the following year’s costs in advance.
- Carry-Forward Unused Tax Deductions – Carrying forward unused deductions, such as net operating losses and capital losses is an effective way to reduce taxable income in future years. These will affect the income statement by gradually being recognized as they offset profits, which reduces taxable income over time. Take advantage of tax rules that allow losses from one year to offset profits in another!
Note that the tax rules for these items can be complex, and you should always make sure you are coordinating your tax strategy with your CPA well in advance of year-end. It is essential to keep accurate records, as well!
5. Equipment Deductions, Depreciation and Green Energy Tax Credits
Is there a piece of equipment you need to replace in your business? If you buy it (new or used) and place it service before the end of the calendar year, you may be entitled to expense the purchase and claim a deduction. Therefore, it’s important to plan your timing carefully. If you’ve had a challenging year and think next year may be more profitable, it may be wise to consider holding off on that purchase for the following year. This will help to give yourself a potential deduction when your tax bill could be higher. But if you’ve had a good year, this is a smart way to reduce your taxable income.
By purchasing equipment or other assets before the fiscal year closes, you can also benefit from immediate or bonus depreciation. This allows a more significant portion of the asset’s cost to be deducted this year. Just make sure the upgrades align with your business needs! After the current year, however, you still can take advantage of depreciation rules to help spread the cost of large assets over the years, rather than deducting the full cost in a single hit. It depends on what may work best for your business.
It may also be a great time to think about green improvements for your business. There are many tax credits and provisions aimed at clean energy to combat climate change, which incentivize business to invest in such technology. Items that may qualify are:
- New or used Electric or Hybrid clean vehicles
- Installing residential clean energy property
- State specific clean energy incentives
6. Review Your Business Structure
How you have your business set up (whether it’s an LLC, corporation, sole proprietorship or other structure) could affect the tax treatment of income and expenses for the business and its owners. Review your business with your tax advisor and lawyer to ensure that you shouldn’t make a change. It may be desirable for tax results, such as lowering your profit or tax rates. It may be worth it to save you some money in tax liabilities.
Perhaps utilizing your business as a pass-through entity (where the business income passes through to the owners, who are than taxed on it as individuals) may help achieve tax savings goals more than another type of structure.
We all know that in a small business, every penny counts. If you can lower your tax liability, it may result in extra profit in your pocket! Or more money you can reinvest in your business. Some may require advanced tax planning, so make sure you work with a trusted tax professional who can identify your unique needs in your business. And ALWAYS make sure your record-keeping is accurate or you may be missing out on legitimate expenses you could write off. Just because the tax year has ended doesn’t mean tax savings opportunities have ended!
Reach out to Knecht Business Solutions today for any assistance you may need in your accounting and bookkeeping questions.