8 Great Year-end Business Tax Planning Tips
Before the end of every tax year, you have the opportunity to save money on taxes by timing, by taking deductions, and by spending money (if you have it, that is) on certain items. This series will help you look at these tax-saving possibilities, starting with the general concept of timing.
Your tax planning for 2018 and beyond should include a look at the provisions of the 2017 Tax Cuts and Jobs Act, detailed below.
The 2017 Tax Cuts and Jobs Act (the "Trump Tax Cuts") should be a factor for your business tax planning for the 2018 tax year and beyond.
First, take a look at the new 20 percent deduction from net business income that's available to small businesses. There are some restrictions and limits.
Second, look at the deductions and credits that are no longer available, like the deduction for entertainment expenses.
Third, if you have bought or plan to buy large capital items like vehicles, machinery, or equipment, check the new higher first-year depreciation limits that could save you money.
Also, small business owners have a new family leave tax credit available through 2019, for giving employees paid family leave.
Save on Taxes by Stocking Up and Pre-Paying
As mentioned in Step One, you can increase expenses (and lower profits) by stocking up on inventory and supplies and pre-paying expenses. If you have any cash sitting around, or you can reasonably use your credit line or a business credit card for purchases, stock up on supplies. For example:
- Look at your office supplies and copy paper and replenish to a reasonable amount.
- If you have supplies you use regularly in your factory, warehouse, or in your work, stock up on these too.
- Pre-pay insurances, like your business insurance or specialized insurance for your type of business (malpractice insurance, for example)
- Pre-pay your rent or your mortgage. If you pre-pay the mortgage, make sure you are drawing down the principal, not just paying additional interest.
- Pre-pay on subscriptions for professional journals or the reception area in your office.
Check with your tax adviser, to be sure the savings will reduce your income.
Save on Taxes by Setting Up a 401k Plan for Employees
If your company will be profitable this year, and you have some excess cash, you can save on taxes by setting up a 401(k) or Safe Harbor 401(k) for yourself and your employees. Even if you have a sole proprietorship, you can still use a 401(k) to set aside money for your retirement and save on business taxes. In fact, the process is easier with no employees, because there are fewer rules.
Tax Benefits of 401(k) plans:
- You can claim a tax credit for your business for the cost of setting up and administering a 401k plan, up to $500 a year for each of the first three years the plan is in existence.
- The amounts you set aside from your business for yourself and employees are deductible as a business expense (up to specified limits)
- The individual employees receive this money tax-deferred, if they put it into a qualified plan; the money isn't taxable until it is taken out.
If you set up the plan before the end of this tax year, your potential savings could more than pay for the cost of setting up the plan and funding it.
Write off Bad Debts to Save on Taxes
Bad (Un-collectible) debts can be written off before the end of the year and the uncollected debts can be used to lower your profits. Here is how this process works:
- During the year, you have accounts receivable which you collect...and some receivables you are having trouble collecting.
- At the end of the year, run an Accounts Receivable Aging Report to see who has not paid you for a long time.
- If the customer is no longer active or has stopped paying, you may be able to cut this customer's balance from your total sales, to reduce your income.
- Add up all the bad debts you want to write off. Be sure you really want to write off these debts. If you receive the money from the customer later, you will have to reverse the write-off and declare the payment as income. Review the list with your tax adviser.
Writing Off and Writing Down Obsolete Equipment and Inventory Can Save on Taxes
Obsolete, damaged, or worthless equipment can be taken off your accounting records to increase your expenses and lower your tax liability. Here is how this process works:
- You should have a list of all equipment in your company, including office equipment and any equipment you use to make products. Go through this list and mark equipment that is: (1) obsolete (out of date), (2) worthless, damaged beyond repair, or (3) damaged but still usable.
- For items that are obsolete or worthless, list the full value of the equipment for write-off
- For items that are damaged but still usable, list the reduction in value for write-down. For example, if you have a computer that you purchased for $2,000 and it's sitting in a back room because you bought a new computer, you can expense the full $2,000 purchase price because the computer is obsolete. If a piece of equipment cost $1,000 new and you feel its value is $300 less because of damage, you can list $300 as an expense, reducing the book value to $700.
- The total of all these write-offs and write-downs can be taken as an expense on your tax return. The assets are then reduced in value.
Give Employees Bonuses or Gifts - Reduce Your Business Taxes
The end of a year is a traditional time to pay bonuses to employees or give gifts and parties. In addition to receiving a tax deduction for these expenses, you also receive much goodwill from employees, especially around the holidays.
Employee/owner bonuses are an expense and can be deducted under certain circumstances. For example:
- S Corporations can deduct bonuses for shareholders and owners, as long as they own their shares at the time the bonus is paid.
- C Corporations can only deduct bonuses for shareholders/owners who have a 50 percent or higher ownership at the time the bonus is paid.
Bonuses to employees of all types of companies are deducible business expenses. But, bonuses to sole proprietors, partners, and limited liability company (LLCs) members are not deductible, because the owners/partners/members are considered by the IRS to be self-employed. This is one situation in which having a corporation and being an employee of that corporation might result in more tax deductions.
Holiday gifts and holiday parties may be deductible as long as they are not routinely/frequently given and are for the purpose of promoting goodwill.
Read more about Gifts, Awards, Bonuses and Taxes
Tax Savings by Taking Bonus Depreciation and Section 179 Deductions
Recent legislation since 2008 has increased accelerating depreciation on certain types of business equipment to encourage business investment by gives businesses the ability to take advantage of tax savings by. These provisions allow you to expense more of the value of business equipment purchased this year, for a larger tax deduction.
Bonus Depreciation provision allows businesses to depreciate 50 percent of the adjusted basis of certain qualified property during the year that the property is placed in service. You should be aware that some states modify or deny bonus depreciation. Check with your state department of revenue to see what the provisions are in your state.
Section 179 Depreciation
Another form of accelerated depreciation involves Section 179 property.
If you are considering buying equipment, you may want to talk with your tax adviser to see if it would be a good tax move for you to buy this year rather than next year.
Save on Taxes by Buying Energy-Efficient Vehicles and Property
Energy-efficient property installed in commercial buildings The energy savings must be accomplished through energy and power cost reductions for the building’s HVAC, hot water, and interior lighting systems. The amount deductible is up to $1.80 per square foot of building floor area for buildings achieving a 50% energy savings target. Available through December 31, 2013. The IRS has also issued a bulletin providing more detail about deductions for commercial property owners for energy efficiency measures.
Alternative Motor Vehicles and Hybrids
The IRS continues to provide information on tax savings for purchase of alternative motor vehicles and hybrid cars. The list of cars is expanding as more auto makers include a hybrid in their lineups. You must be the original purchaser of this vehicle, but you receive a direct tax credit (as opposed to a deduction), which means greater tax savings.
Step One - Timing Income and Expenses
As you get to the end of your business tax year, you may have the option of taking income in this year or next year. If you can take income in the year of the lower profit, you may be able to minimize your taxes.
For example, if this year you will have a loss, but you know you will have a profit next year, you may want to encourage customers to pay you this year when your profits will be lower. If you think your profit will be lower next year, try to move payments from customers into next year. This is tricky, since you don't really know what will happen next year, but it is worth a discussion with your tax adviser.
When considering whether to take a deduction for an expense this year or next year, here are three points to take into account:
- Take the deduction the year when your profit is higher. This will result in lower profits in that year.
- Take the deduction in the year when the deduction amount is higher. Some deductions change from year to year. Learning about these changes can save you money by allowing you to take the deduction when it is higher.
- Take the deduction in the year when the tax rates are higher. If you know that business tax rates will increase next year, take the deductions next year to minimize your taxable income in that year.
The principle of timing income and expense deductions, if done thoughtfully and with the assistance of your tax adviser, should lower your business taxes.