The birds are chirping, the weather’s getting warmer, and “tax season” has drawn to a close. Understandably, you may want to take a break from thinking about taxes, and instead, focus your attentions on growing your business and increasing profits.
But while this subject is fresh in your mind, now would be a good time to start thinking about taxes as part of your overall business planning as you move forward.
Because business taxes can be complicated and are almost constantly changing, it is easy for small- and medium-sized businesses to miss out on ways to keep their tax burden as low as possible. Consulting with a tax professional now can help you to strategically plan, and take actions during the year to reduce your tax liability.
The following list includes a few common ways that businesses can lower their taxes:
1) Consider changing your business structure. If your business started out as a sole-proprietorship or LLC and has grown, switching to an S-corp could make sense. While an S-corp structure requires more documentation than an LLC, making the change typically is not overly difficult for businesses and can provide substantial tax advantages. If you’d like a refresher on this subject, see our previous post.
2) Think about the timing of your income and expenses. Savvy businesses can plan to defer some of their taxable income to the following year by postponing a portion of their billable revenues until the following year. Similarly, businesses can time certain expenses to increase their deductions for the year. For example, a company expecting a very profitable year may opt to move up a needed purchase of equipment or property, thereby lowering the expected increase in taxable income. There are limits to what is allowable under the law and feasible for each business, but many companies benefit from this type of advance planning.
And a few more specific suggestions:
3) Think about your business equipment deductions. Tax laws provide certain conditions under which businesses can claim depreciation allowance as first year expensing instead of the standard depreciation that takes place over multiple years. Also, as we’ve described in a previous post, the R&D tax credit can apply to wide variety of business expenses. This credit has been underutilized by small- and medium-sized businesses.
4) Take a look at your vehicle/fleet expenses. Many companies deduct these expenses using the IRS standard mileage rate, but another way to do this is to report actual costs. While this method requires more careful tracking, doing this gives you the option of choosing the deduction method that is most advantageous for you.
5) For employee expenses, consider using an “accountable plan.” This enables you to reimburse employees for these expenses without treating it as income – thereby reducing income taxes for your business as well as for your employees.
6) Reward employees with improved benefits. While sometimes there is no substitute for a pay raise, consider rewarding employees through benefits such as increased health insurance or retirement contributions. Again, this provides tax benefits for your business as well as for your employees.
This is just a partial list of things that companies can do to reduce their taxes. Business taxes are nuanced, and keep in mind that tax law is designed to minimize “loopholes.” But with planning, there are numerous, and perfectly legitimate, ways that businesses can reduce their taxes. Each year is different for a business depending on its earnings and profitability, and tax provisions change frequently. Talking to tax experts early in the year makes sense as part of your overall business planning.