As a business manager, you are required to wear many hats, but your
major responsibility is to keep the business profitable. One way to improve
your overall performance is by reducing the income tax you pay.
Here are a few simple tax strategies that are available to most businesses.
Give careful consideration to the legal form of your business.
Both the tax and nontax consequences can be significant. The basic forms of business include sole proprietorship, partnership, corporation, or limited
liability company. We can assist you and your attorney
in determining the best form for your business.
If your business is incorporated, it is often a good idea for you to personally own the business real estate and lease it to your corporation.
There are a number of tax and nontax concerns relating to real
estate ownership. See us and your attorney before you
acquire new business property or before you change
the ownership of property you already have.
Consider a SEP or a SIMPLE plan.
Some small businesses find many profit-sharing plans too complicated and costly to set up and administer. A SEP (Simplified Employee Pension Plan) or SIMPLE
(Savings Incentive Match Plans for Employees) may
work for you. Because of their relative simplicity, they
can be good choices for the very small business.
You are allowed to deduct the entire cost of
certain depreciable equipment in the year it is
purchased.
Most business equipment is depreciated over five or seven years. However, small businesses are allowed this Section 179 deduction each year, with certain dollar limits. If your total equipment purchases exceed a certain amount for the year, the expensing
option phases out.
Don’t subject yourself to tax penalties by
misclassifying an employee as an independent
contractor.
The IRS is aware that employers prefer to
treat some workers as independent contractors to avoid
paying payroll taxes and fringe benefits. Some types of
businesses are more closely watched by the IRS than
others. If you’re not absolutely sure how to classify a
worker, please contact us.
Consider a tax-deferred exchange of property.
This is a tax planning technique which should be considered by any business that is relocating or disposing of property. Often referred to as a “tax-free exchange,” the
tax-deferred exchange allows you to exchange certain
business or investment property for other “like-kind”
business or investment property and pay no income
taxes currently. Your tax liability is deferred until you
later dispose of the property for which you traded.
Exchanges require careful planning and professional assistance.
Never try to use the IRS as your banker.
When cash flow is tight, you may be tempted to pay your suppliers first and your payroll taxes last. The IRS will take steps to minimize the liability as quickly as possible. The deduction is also limited to the amount of your taxable income for the year (business income, salary, and wages).
Avoid being penalized for underpaying your taxes.
Self-employed individuals generally are required
to pay taxes through quarterly estimates which are due
on April 15, June 15, September 15, and January 15 of
the following year. Late or inadequate payments mean
that you will be assessed penalty and interest charges in
addition to your regular tax liability. You are required
to make estimated payments even if it is your first year
in a new business.
Hire your children to work in your business.
The wages paid will be deductible by the company and
taxable to the child, probably at a lower tax rate than
yours. Keep in mind that the amount you pay your child
has to be reasonable for the services performed.
You can compound the benefits of hiring your child
by having him or her contribute to an IRA. Use a Roth
IRA, and your child can accumulate a sizable tax-free
retirement nest egg.
Understand the difference between tax credits
and tax deductions.
Tax deductions reduce the amount of income subject to taxation.
Tax credits give you a dollar-for-dollar reduction of your tax liability.
Congress often uses tax credits to encourage certain
activities. Regularly investigate those credits that might
be available to cut the taxes your business pays.
They also have a powerful weapon available to collect
such taxes. Whether or not you own the company, you
could be determined to be a “responsible person.” This
means that the IRS can hold you personally liable for
100% of any payroll tax deficiency.
Deduct as much of your family health insurance premiums as the law allows.
You may be able to deduct 100% of the cost of medical, dental, and
long-term care insurance for you, your spouse, and
your dependents. To qualify, you must have a profit
from self-employment or wages from an S corporation
in which you own more than 2% of the stock.
If you conduct some or all of your business from your home, be aware of the home office deduction.
Generally, a portion of the home must be used
exclusively and regularly for business in order to allow
a deduction as a home office.
A home office can qualify as a “principal place of
business” even when it is just used by the taxpayer for
administrative or management activities of the business,
as long as there is no other fixed location to conduct
these activities.