The #1 Rule You Need for Business Tax Planning
Hint: It's All About Your Total Tax Bill
Ready to do some business tax planning? It's never to early to start. Planning to minimize your business taxes shouldn't be done in a vacuum. The key is to remember Rule #1: Think BALANCE. That is, balance taxes with your other business goals and consider different kinds of taxes, so you can save on your total tax bill.
Some tax planners think only of business income taxes, but there are other taxes businesses pay, and business owners also pay personal taxes too, so all of this must be considered in balance.
Look at some examples that show how balancing taxes works:
How to Minimize Taxes along with Personal and Business Costs
Example #1: Taxes and Business Type
Joe's small sole proprietorship business is making a profit this year and his tax planner is suggesting he form a corporation. But if he incorporates he will need to become an employee. As an employee, he is personally responsible for half of the FICA taxes (Social Security and Medicare costs). He needs to look at all taxes he pays personally and through his business to see what might be the best business type for him.
Example 2: Moving a Business
Joe wants to move his business to Florida to take advantage of what he thinks are lower taxes. He knows that Florida has no state income tax, which he considers a big tax savings. But some other costs are higher in Florida. He might save on his business state income tax but he will pay more to have business vehicles in Florida, because of higher insurance costs. He may also have to pay more for a business license, and for other licenses and permits.
Example 3: Timing Income and expenses at year-end.
Joe and his tax advisor are considering moving some of his business income into next year, but he must first consider his accounting system (cash vs. accrual) and the possibility of higher or lower taxes next year before he makes that decision.
A Checklist of Business Taxes and Costs
To help you with your business tax planning and considerations of other business costs, here's a checklist to consider:
- Business income taxes, depending on your business legal form.
- State and local income taxes, depending on your business location.
- Business licenses and permits, depending on your business location and business type.
- Employment taxes. While most employment taxes are federal, states may have different employment tax costs.
- Self-employment taxes can be higher or lower, depending on your total business income.
Monitor Tax Law Changes
The newest tax law changes from the 2018 Tax Cuts and Jobs Act has many effects on your business planning. The new law includes a lower flat corporate income tax rate and lower rates for individuals. But these lower rates are offset by higher standard deductions and elimination of the personal exemption. This is an effort at simplification, but it eliminates or reduces the effects of tax shields like mortgage interest. Other business and personal tax deductions have been reduced or eliminated.
A possible benefit to small businesses that are not corporations may be a 20 percent tax cut on business net income in addition to typical business deductions. You will need to pay careful attention to this possible deduction to see if it benefits your small business.
Read more about all the changes in the Trump Tax Plan and how they might affect any tax shields you are considering.
Don't Forget Organization as a Tax Savings Device
Being organized and having great business tax records is also important to minimize taxes. If you have a record of all business expenses (including small items like petty cash), you can add them to your business tax form and reduce your profit for the year. Having good records is most important in accounting for travel, meals, and entertainment expenses. Without good records, you risk being denied the deductions if your business gets audited.
Disclaimer: The information in this article and on this site is not intended as tax or legal advice, but as general information. Federal, state, and local taxes and regulations change often, and every business is unique. Before you do any tax planning or make changes to save on taxes, consult your tax professional and other business advisors.