Smart tax preparation can make a big difference for your company. Different companies have different tax planning strategies that they use, but general principles exist that apply to any type of business. If you’re a business owner who wants to mitigate the impact of taxes, try applying one of these strategies.
Postponing Income and Accelerating Deductions
You can decide whether to incur a payment in the current or next tax year, which would also affect the duration of your deduction. You will also have leverage over whether you collect any of your profits in the current year of taxes or the following year. Taxes on deferred income are not paid until the next year and the expense you took early on can be deducted from your current income.
Depreciation
Depreciation allows companies to write off an asset’s value over a period of time. It can help companies reduce their taxable income, which means they also reduce taxes. Depreciation was commonly spread out over years, but the Tax Cut and Jobs Act of 2017 has allowed businesses to depreciate 100% the year the asset was acquired.
According to the IRS, taxpayers can now choose to depreciate the cost of qualified property in the year it is placed in service. The law also increased the maximum deduction from $500,000 to $1 million.
Qualified Business Income Deduction
Many owners of small businesses may be eligible for a qualified business income (QBI) deduction, or Section 199A, under the new law. The deduction them to deduct up to 20% of their qualified business income, plus 20% of qualified real estate investment trust dividends and qualified publicly traded partnership income.
Keep in mind that this deduction only applies to “pass-through” businesses—businesses where the owner reports the income in their personal tax return. These include businesses organized as sole proprietorships, partnerships, and S corporations.
Retirement Funds
Retirement plans also benefit businesses. Sole-proprietorships, as well as other types of pass-through entities and taxable organizations, can set up a 401k plan that may help reduce taxes. The costs of implementing a small business retirement plan, such as a SEP IRA, Simple IRA, or 401(k) plan, are fully deductible. Setting up a retirement plan for employees is also a win-win as the contributions made to employee retirement accounts are also deductible.
Relocation
A number of small companies relocate because of lower corporate taxes in another city or state. Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming have no personal income tax. But before you pack up, make sure other taxes like the new location’s sales, excise, and property taxes. For instance, Washington has a higher-than-average cost of living and housing, which could hurt you more than it could help you.
Giving Fringe Benefits
If you’re worried about the additional tax added by additional wages, consider providing fringe benefits to your employees to reduce your taxable income. Tax-free fringe benefits include accident and health benefits, educational assistance, group-term life insurance coverage, HSA, meals, and more. The latest edition of the IRS’s Publication 15-B can give you more details on which benefits are excluded from taxation.
Need Help with Your Small Business Taxes?
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