As a business owner, it’s your job to take care of a host of obligations. At one moment, you may be handling a human resources issue, and at the next, coping with a customer complaint. Wearing so many different hats can make it difficult to stay on top of the big picture, especially taxes.
At Cook Martin Poulson, we’re familiar with the tax challenges that businesses face. In fact, one of the most common questions we hear from our business clients is this:
What’s the best tax strategy to use for my business?
Having a tax strategy is essential because it governs everything you do and provides a framework that allows you to fulfill your tax obligations without overpaying. Here are 10 of the best tax strategies for business owners.
#1: Look for Ways to Reduce Your Adjusted Gross Income
Many of the taxes you pay are tied to your adjusted gross income, or AGI. For example, if your AGI doesn’t exceed $200,000, you won’t be required to pay the additional .9% in Medicare taxes. You can lower your AGI by reducing your salary or:
- Contributing to a tax-exempt retirement plan
- Itemizing deductions if they exceed your standard deduction
- Contributing to a health savings plan
If you think you might want to itemize deductions, consider tracking them on a spreadsheet throughout the year. That way, you won’t need to scramble to calculate them at tax time.
#2: Be Strategic with Your Tax Elections
Applying some strategy to your business expenses can help you reduce your taxable income. For example, if you acquire new business equipment or machinery, you can deduct the cost up front up to $1 million under the 2018 tax law.
However, for new businesses or those that aren’t yet turning a profit, you may want to consider depreciation as an alternative. Depreciation allows you to deduct the value of your purchase in future tax years instead of all at once. That’s beneficial if you expect your profits to increase and push you into a higher tax bracket.
Other tips include:
- Deducting home office expenses based on actual costs or the IRS simplified rate, which is $5 per square foot up to 300 square feet of space.
- If your business has been impacted by a disaster, you can claim the losses on prior year returns instead of the year when the disaster occurred.
- You can choose between deducting vehicle expenses based on the actual cost or the IRS mileage allowance of 53.5 cents per mile.
- Deduct business insurance expenses, including liability, workers’ compensation, commercial auto, and business interruption services insurance.
The IRS scrutinizes insurance deductions closely, so ask your accountant before taking deductions.
#3: Acquire Assets at the End of the Year
In some tax years, it may be beneficial to estimate your business taxes and then acquire new and used assets to reduce your taxes.
The Tax Cuts and Jobs Act of 2018 allows a 100% bonus depreciation. It may be worthwhile to take advantage of it – particularly in years when your profits have been high.
#4: Establish Fringe Benefit Plans for Employees
When you increase employees’ wages, you also trigger higher employment tax costs. One way to get around that is to offer fringe benefits as part of your employees’ compensation.
Some of the tax-exempt benefits you may want to consider include:
- Health benefits
- Long-term care insurance
- Disability insurance
- Group term life insurance
- Childcare assistance
- Tuition reimbursement
- Employee meals
You can find more information about eligible fringe benefits here.
#5: Take a Tax-Free Loan from Your Business
A lot of business owners don’t know that they can take out a low- or no-interest loan from their business. If the loan interest is below the Applicable Federal Rates set by the IRS, you may need to report the interest.
You can check out the current IRS set rates here. Of course, you should ask your accountant before implementing this strategy.
#6: Don’t Ignore Carryover Deductions
You probably already know that some deductions have limitations. The same is true of tax credits, which means that you may not be able to use them fully in the current year. However, you may not be aware that some of these deductions allow a carryover to future years.
Examples of carryovers that may be useful include capital losses, general business credits, home office deductions, net operating losses (up to 80% of taxable income), and charitable contributions.
#7: Use Accountable Plans
Do you reimburse your employees for things like entertainment, travel, and other costs? If you do, you may want to use an accountable plan. Using an accountable plan allows you to deduct the expenses without reporting the reimbursements as employee income. In other words, it can reduce both your employment taxes and your overall taxable income.
As a bonus, using an accountable plan can also save your employees money on taxes. That’s because under the new tax law, employees can no longer deduct miscellaneous unreimbursed employee expenses.
#8: Abandon Property Instead of Reporting it as a Capital Loss
If your business owns property that has no value, you might be tempted to sell it and report it as a capital loss on your taxes. However, there are some benefits to abandoning it instead.
Abandonment of property allows you to take an ordinary loss – which is fully deductible – instead of a capital loss, which is subject to limitations. Keep in mind that a Section 1231 property may be ordinary or capital depending on other Section 1231 losses for the year and for prior losses.
#9: Defer Taxable Income
Are you using cash-method accounting for your business? If you are, you can take advantage of that by carefully managing your business taxable income to minimize your taxes. If you anticipate that your business income will be taxed at the same (or lower) rate next year, here are a few tips to help you defer some of your income.
- Put recurring expenses on your credit card. You can deduct them in the current year even though you won’t pay them until next year.
- Mail checks a few days before the end of the year. You can deduct the expenses in the year you mail the checks. If you’re mailing a big check, use registered mail so you can prove the mailing date.
- Prepay expenses at the end of the year, provided that the benefit does not exceed IRS limitations (the earlier of 12 months before the first date on which your business realizes the benefit or the end of the next tax year.) For example, you could prepay your office rent or prepay some of your insurance premiums.
- Delay sending invoices until the last few days of the year. That way, you’ll receive payment in the new year and can report the income in the new year as well.
You’ll need to be cautious with the last strategy. Don’t delay sending invoices to customers who pay slowly.
#10: Hire Your Spouse or Children
If your spouse or children can contribute to your business, then put them on the payroll. Kids can work tax-free if their income is below the IRS threshold. The Tax Cuts and Jobs Act of 2018 nearly doubled the exemption amount for dependent minors.
As a bonus, you can take the money you pay your kids and put it into an education savings account or Roth IRA. You also won’t need to withhold payroll taxes.
Create a Solid Business Tax Plan with Cook Martin Poulson Today
There’s no reason to overpay on your business taxes. Using the 10 tax strategies we’ve outlined here will help you minimize your taxes while still fulfilling your obligations. Navigating these decisions can be difficult, but are easily manageable with the right professional support.
Need assistance planning your tax strategy? Cook Martin Poulson can help you create an excellent tax plan for you and your business.