Filing your business taxes correctly and on time is a must. But some entrepreneurs are ready to move beyond these basics and take a more proactive approach to next year’s return. Whether that means becoming more knowledgeable about your individual tax situation, or adopting a new planning strategy, it’s never too soon to get started.
Tax planning should be an ongoing process that unfolds with the help of a qualified professional. Tax laws change frequently. And staying on top of what’s new can mean the difference between a plan that actually saves your business money, and one that leaves it struggling to undo what’s been done.
Business Tax Deduction Refresher
Did you know that a good many of the taxes your company pays – from business license taxes to property taxes - are considered a cost of doing business and can be deducted accordingly on your annual tax return? So many of these business tax expenses are deductible in fact, that you’re better off becoming acquainted – or reacquainted - with the ones you can’t claim.
Most businesses cannot deduct:
- personal taxes, like those associated with your home or other personal property,
- federal income taxes assessed on business income (although state income tax and other state or local taxes may be deductible in some circumstances),
- employee payroll amounts withheld for federal income tax purposes, including social security and Medicare,
- your own social security or Medicare amounts paid as self-employment taxes, and
- property taxes and assessments related specifically to local property improvements like sidewalks, sewer lines, or public parking
Remember, not only must all allowable tax deductions be business-related, you can only claim business tax deductions in the year that they’re paid.
Basic Tax Strategies
Aggressive expense-based tax strategies are not a good fit for every business. To begin with, you must actually be spending money on equipment or expenses related to maintaining or improving your operations in order to benefit.
You should also be aware that, since most of these strategies involve planning and pacing large-scale purchases, they’re only effective for businesses with cash-based rather than accrual-based accounting systems.
A basic tax planning strategy that leverages the timing of certain business expenses can go one of two ways:
- Your business can choose to make purchases scheduled for next year during this year instead if you find you’re experiencing higher than expected profits in the current tax year.
- Your business can choose to delay purchases scheduled for this year until next year instead if revenues are down but you expect them to bounce back in the coming tax year.
Either scenario has the potential to offset business income and reduce the taxes you’ll owe, but you should avoid taking on unnecessary expenses just to reduce your tax bill. A dollar spent is rarely equivalent to a dollar saved on your tax return, so generating artificial business expense deductions will only set you back financially.
The Tax Cuts and Jobs Act
The somewhat ambiguous Tax Cuts and Jobs Act is a perfect example of why it pays to seek advice from an accounting professional. The new Act includes a 20% tax deduction against business income for entrepreneurs operating pass-through entities like LLC companies and S-corporations - but only if:
- your taxable income is less than $157,500 and you’re single, or
- your taxable income is less than $315,000 and you’re married and file jointly
This seems straightforward enough, but there are other less clear-cut restrictions surrounding exactly who qualifies for this new tax deduction. And many accountants believe there’s enough wiggle room in the wording of the Act to warrant some assertive tax planning techniques, including:
- starting or switching your business to an LLC designation
- splitting a single company in two – the second of which would serve as a pass-through entity that owns the property out of which the first company operates
- classifying as much of your S-corporation income as profit as possible, while drawing as small a salary as the IRS deems “reasonable”, to further reduce self-employment taxes
Entrepreneurs would do well to remember, however, that while much of the Tax Cuts and Jobs Act lies open to interpretation at the moment, overly aggressive tax planning tactics could come to nothing (or worse) as the regulations involved become clearer.
One final word on tax strategies for the uninitiated: moving money from one place to another “inside” your business won’t result in a new tax-deductible expense. This includes money your business spends to pay down debt like loans, credit lines, and credit cards or to pay you a bonus or shareholder distribution.