10 Advantages of Tax Planning for Small Businesses

Unfortunately, it seems as though small business owners never have enough time on their hands. As a result, tax planning is something that gets put on the back burner and sometimes never completed. However, tax planning quite often is an item that pays dividends down the road. Overall tax planning is a process that usually involves projecting a full year of business activity based on 9 to 10 months of data and expected yearend activity. At the very least, tax planning can eliminate the unknown worry of owing a large sum of money at the end of the year. By doing this, business owners can position themselves to succeed in the future by reducing their tax liability, which can leave more for investing or saving.

Tax planning can help to reduce a taxpayer’s tax liability or maximize their refunds. There are a number of factors that come in to play though. How is your business doing? If your business is booming this year, you could be left with a large tax bill when your tax return is prepared. The good news is that there are a number of options a business can decide from that can save them money. On the flip side, maybe your business is not having as good of year as anticipated. There are still some actions that can be taken to reduce the amount of other taxes paid, whether its payroll tax or future income tax.

1. Invest in your business – Buy a piece of equipment or vehicle

One of the most efficient ways to reduce taxes is to reinvest in your business. Reinvesting can take a variety of forms, but most commonly involves purchasing new equipment to replace older and/or less efficient equipment. Depending on the equipment purchased, accelerated depreciation can usually be taken to reduce taxable income in the year of purchase.

2. Pay yourself first by starting a retirement plan

A retirement plan can essentially lower the amount of wages that are taxable on your personal return. For S-Corps and C-Corps, the employer match is also deductible for the business, helping to lower the tax liability while putting more away for retirement (paying yourself first). For Schedule C businesses and partnerships, contributions to the plan can create an automatic deduction against your taxable income. Various retirement plans have different limitations based on your self-employment earnings and can be determined when your tax return is filed. Many retirement plans have deadlines for setting up so it is best to know earlier rather than later if setting one up might benefit you.

3. Pay family members

Already have a retirement account but want to put more away? If your spouse is involved in your business, you can put your him or her on the payroll and fund a retirement account for them as well. This again will reduce your overall taxable income and pay yourself first.

4. Donate old or stagnant inventory

If you are a retailer, it is possible that you have some inventory that is not moving much or even has lost its value. Maybe you have considered marking it down to try to sell it at a loss. Another option would be to donate the inventory item to a charity auction or to a location like Goodwill or Saint Vincent de Paul’s. Instead of selling it for less than cost, donating the item could give you a deduction for the cost of the inventory item.

5. Change your business structure

Sometimes the easiest way to save some money is changing the tax structure of your business. There is a certain level of income that a business owner reaches where it becomes more beneficial to be an S-corporation instead of a sole proprietor or partnership. There are a number of different factors that can affect this decision so it is best to talk to your tax professional to see if changing your tax structure would benefit you. Changing your tax structure can be done without changing the legal structure of your business.

6. Salary deferral

If you are a business that pays yourself officer wages, it may be advantageous to defer some of the salary you are being paid. If your business income is lower and you do not need the deduction, why pay the FICA and unemployment taxes on the unnecessary wages?

7. Wait to buy that equipment or vehicle

If your business was looking to buy a new piece of equipment or a vehicle, maybe waiting that extra month until the next calendar year is the best option. Saving that deduction for the next tax year could save you more money down the road if the deduction is not needed in the current year but could prove highly beneficial the next year.

8. HSA contributions

Health Savings Accounts are one of the greatest personal tax deductions available. With the new tax laws passed in 2018, it is estimated around 88-90% of taxpayers will not be itemizing their deductions. This means that your medical expenses, which were already limited, are no longer deductible to the majority of taxpayers. A contribution to an HSA gives you a direct deduction against your taxable income regardless of whether you itemize or not. You can then use these funds for any medical expenses you might have and the distribution is not considered taxable.

9. Traditional IRA contribution

Much like the HSA account, a traditional IRA contribution is a direct deduction against your taxable income. This time though, it is going into a retirement account that you will not be able to touch until the age 59 ½. If you are looking to put money away for retirement, this can be a great option to reduce your tax liability at the same time.

10. Advanced Premium Tax Credit

Do you receive an advanced credit for your marketplace health insurance? If your income is too high, you may end up having to pay that credit back to the IRS. Using any one of the business or personal methods to reduce your income could help prevent that from happening though. Having the peace of mind knowing you don’t have that surprisingly large tax liability at the end of the year could easily be worth a quick tax planning meeting.

You are busy running your business doing the things you do best. Let us do what we do best and help you save money on taxes, so you have more money to grow your business going forward. Set up a tax planning meeting with one of our tax professionals to see how you can benefit from this valuable service.