Small Business Tax Planning Tips

LAST REVIEWED Sep 18 2019 9 MIN READ

By Cyndia Zwahlen

Saving on taxes for your business is a year-round endeavor. Don’t wait until Tax Day in 2017 (April 18th for personal tax filing and March 18th for corporations) to act. By then it will be too late to do much to cut your 2016 tax bill and keep more of your hard-earned profits. That doesn’t mean you should file your tax return now, of course. But you can make sure your business is set up to take all the tax deductions and credits for this year, and plan ahead for next year. If you invest a little time in tax prep now, you’ll likely be able to free up more money to help your small business grow in the future.

Meet with a tax advisor

Whether you already have a tax-savvy advisor or are ready to set up your first appointment with one, fall is a great time to meet. After the Oct. 17 tax-extension deadline has passed, tax advisors will have more time to spend with new clients or help existing ones. So set up an appointment now. If you think your current tax advisor isn’t finding all the deductions or credits your business can take or is not providing the long-range tax strategy you want, it may be time to switch to a new advisor. Not sure if you need an accountant? Or whether you should choose a CPA (certified public accountant) or a tax attorney? Typically a tax attorney, who can represent you or your small business in tax court, is best to handle a serious tax situation. If you are audited, either a tax attorney or a CPA can represent you. But for most run-of-the-mill tax advising and planning you won’t need a tax attorney. How do you find the best tax advisor for your small business? Ask other small business owners for recommendations. And if you belong to a trade group or professional organization, check the membership directory for affiliate members. Those are usually the service professionals or vendors that specialize in your industry. And don’t forget that a tax professional’s fees are a tax-deductible business expense! Related article: Small Business Finances: Should You Hire a Bookkeeper, an Accountant, or Both?

Can you lower your corporate income tax rate?

IRS tax brackets for individuals, which cover sole proprietors and limited liability companies, range from 10% to 39.6%, according to the Tax Foundation. Corporations use a different tax scale. Technically a corporation will be taxed from 15% in the lowest bracket (taxable income of $50,000 or less) up to 39% for taxable income of $100,00 or more. With this information, you can decide what tax moves to make before the end of the year to potentially drop into a lower tax bracket. For example, if you are a sole proprietor or have a limited liability company and file as a single person and your taxable income is $190,160 you would be in the 33% tax bracket. If you can shave $20 off your taxable income, you’ll drop into the 28% bracket. That means free tax savings for you. To figure out some of the best tax moves for your small business, you’ll need to have complete clarity around how your business accounting is set up and how income is counted. Cash method or accrual method? If it’s the cash method you count revenue when you receive it and expenses when you pay them. Most small businesses use this method. If it’s on an accrual basis,  you count revenue when an order is received or you deliver it. Expenses aren’t counted until you receive goods or services. So if you use the cash method, you could delay billing for a job until late in the year, so you won’t get the money until 2017. That pushes the income taxes you owe for it into next year, too.

Spend now to save later: business expenses

Under the catchy name Section 179, the IRS gives small business owners a great tax break for capital investments. A small business can spend up to $500,000 a year to buy new or used office furniture, computers, software, business equipment or vehicles and take the entire depreciation deduction (the total cost of the item) right away, with some limitations, instead of over several years. Of course, if it makes more sense for your long-term tax strategy, your business can still break up the cost and take the depreciation deduction over several years, say if you need to lower your tax bill for years where you’ve made more money. Once your purchases hit $2 million in a year, the tax break phases out. When you spend more than $2.5 million, it no longer applies. Other ways to spend now and save later include giving to charity and giving gifts to clients or employees. So plan your gifting now to take advantage of the $25 per person business gift deduction.

Set up a retirement savings plan for your team

If you have an employee retirement savings plan recognized by the IRS, you can deduct your business’s contributions to the plan. If you want to deduct your contributions on your 2016 tax return, now is the time to start offering it to your employees. If you are self-employed, you have another option and more time to set it up: A Solo 401(k) plan for 2016 can be set up through Dec. 31. Then you have several more months to contribute to it: If your business is incorporated, the contribution deadline is March 15, 2017. Other businesses have until April 18, 2017.

Prepare your cash flow for Q1 and Q2 tax payments

Be prepared to make several tax payments early in the year. If you are required to make estimated tax payments throughout the year, don’t forget that on January 17, your Q4 payment is due. Then, on March 15th, corporations have to file their annual tax returns and pay any taxes still owed. By April 18th, all first-quarter estimated taxes are due and sole proprietors, limited liability companies and partnerships, all of which are considered individuals by the IRS, have to file their 2016 tax returns and pay any taxes still owed. Take the time to enjoy the fall weather and holidays, but also make sure to take time to do some quick tax research and preparation to set your small business up for a success in the new year. Image credit: Abigail Keenan

Cyndia Zwahlen, a former small-business columnist for the Los Angeles Times, is a freelance business writer and editor for media, academic and business clients. She founded the Small Biz Mix blog.

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