8 Great Ways to Cut Your Business Tax Bill
Using Depreciation, Deductions, Credits and Write-offs
It's the end of the tax year, but there is still time to take action on your company's financial position so you can save on business taxes. Print out this article and take it to your tax professional now, to discuss possible tax savings strategies.
Fund a Business Retirement Plan
Talk to your financial planner or tax advisor about the possibility of funding a qualified retirement plan for yourself and your employees. If you are self-employed and have no employees, you may want to look at a self-employed 401(k).
Read more about Solo 401k plans, and other small business retirement plans, in this article from Beginners Investing.
Take All Legitimate Tax Deductions
The IRS has many acceptable tax deductions you can take to reduce your business taxes. If it's a legitimate business expense, and your business records can show the money was spent, you can most likely take the deduction and reduce your business taxes. Take some time to read through this list of business tax deductions from A to Z to make sure you haven't missed a deduction.
Buy Equipment or Company Vehicles for Depreciation Deductions
Depreciation deductions have never been better, and they may not be as good next year, so you might want to look into purchasing a company vehicle or equipment and put it into service (start using it) before the end of the year. For many business assets, you can depreciate (deduct from taxes) 100% of the cost of the item, through the bonus depreciation allowance, in addition to other accelerated depreciation methods.
Starting in 2016, the rules for bonus depreciation and Section 179 deductions have been increased and set for several years. It's a good time to look at buying business equipment and vehicles, to take advantage of these increased savings.
Pay Bonuses, Gifts to Employees and Owners
One way to share the wealth, so to speak, is to give bonuses to employees and owners. But you need to be aware of the tax implications, both to the company and to the employees or owners. For example, an employee bonus is taxable as income to an employee.
Write off Old Inventory and Obsolete Equipment
To "write off" an asset means to take it off your company's balance sheet. This has the same effect as depreciation and this means your company's income will be less, resulting in lower taxes. If you have old inventory that needs to be disposed of or obsolete equipment that you aren't using, the end of the year is time to take the current value of those assets off the books to save on taxes.
Write off Bad Debts
In the same way as taking equipment or inventory off your books, you should look at your accounts receivable aging reports and focus on customers who haven't paid you in a long time and who probably won't pay. You must use the accrual method of accounting to take these bad debt write-offs, so check with your tax professional if you aren't sure which method you use. Taking those amounts off receivables is another tax-cutting measure that many companies use at the end of the year. Read more about how this works in this article about accounting methods and timing income and expenses.
Some Timing Tips to Cut Business Taxes:
A major part of tax cutting is timing of business income and expenses to shift income to the year where it will have the biggest effect in lowering taxes. There's also a fair amount of guesswork involved in knowing what tax rates will be in each year and other considerations, so it's best to discuss these strategies with your tax advisor.
Stock up and Prepay
To reduce your tax bill, stock up on office supplies and inventory. You can also pre-pay such items as insurances, mortgage interest, and even memberships and subscriptions, as long as these items are business-related and can be deducted.
Time Income and Expenses at Year-end
One of your biggest tax cutting strategies can be the timing of income, moving it to the year where you expect the lower taxes. For example, if you think your profits will be lower next year, put off sending invoices until after January 1. Having a good tax advisor and a competent CPA is essential if you want to use this strategy.
The information in this article and on this site is not intended to be tax or legal advice, but to present general topics for discussion with your tax professional. Every business situation is unique, and tax regulations are constantly changing. Talk to your tax or legal advisor before utilizing any tax cutting strategies.