You may be able to identify potential tax savings based on your business’s unique situation and accounting method. Here are some ideas for lowering your taxes.
As you look for potential tax savings, it’s important to understand which accounting method your business uses. The cash basis method reports the actual inflow and outflow of cash and allows for deductions and income reported for the year they are paid and received, while the accrual basis method applies income and expenses in the year incurred. The tax strategies discussed here require you to have a good understanding of your balance sheet and cash flow, and it may be helpful to review these steps with your accountant.
To help keep your tax tab down, consider these five tax planning tips:
1. Think about Taxes Regularly and Meet with a Professional
It’s easy to put off tax planning, but consistently connecting with your accountant will help you maximize savings year round. View each business quarter as an opportunity to make progress in your big-picture tax plan. Work with your accountant to determine the best accounting method for your business. If the method you are using isn’t the best, you can request to change your accounting method with the IRS. Confirm that you’re taking advantage of all applicable deductions and that you understand all relevant tax regulations and laws, which change regularly. Ensure that you are setting aside money for, and making payments on, your quarterly estimated taxes.
2. Introduce Retirement Accounts
“Consider putting a pension plan in place for your business. It is a great way for a small business owner to save taxes and accumulate money for retirement,” says Mario Conde, a certified public accountant and founding partner of CondeBoyce LLP, a full-service public accounting firms in the New York metro area. She adds that it can also help keep and attract talented employees. Talk with your accountant about which retirement plan might make sense for your business.
3. Stay on Top of Bookkeeping
Make sure your accounting records are up to date and that you’ve correctly labeled any loans made to the business (including loans you made from your personal finances). These loans aren’t considered taxable income. “Periodically, I see loan money recorded as revenue in the ledgers, and you don’t want to pay extra taxes because of sloppy bookkeeping,” Conde says. “Also make sure you have recorded any out-of-pocket business expenses that were, for whatever reason, paid with personal funds instead of business funds.”
4. Review Your Corporate Structure
Work with a tax and/or legal professional to evaluate your business entity. “Are you operating as a sole proprietor when you should be an S-corporation or a limited liability company? Consider doing this now so any change in entity structure is in place as soon as possible,” Conde advises. This is especially important in the wake of tax reform, which updated the income tax rate for C-corporations to a flat rate and changed the tax structure for pass-through businesses.
5. Take Advantage of Deductions and Defer Income
If you are a cash basis taxpayer, income is taxed in the year it is received. If you think you will be in the same or lower tax bracket next year, “It may be a good idea to defer at least some of your year-end accounts payable until the following year,” says Deborah Sweeney, CEO of MyCorporation, which helps small-business owners incorporate and form LLCs. Doing so can help reduce your overall tax liability.
Increase your deductions by strategically purchasing big-ticket items, such as equipment or software. Tax reform updated the rules around how you can deduct for capital expenditures, so make sure you are familiar with the changes, and talk to a tax professional to see how the new rules might affect you.
Remember, tax planning is a yearlong effort. Don’t wait until the end of the year to consider your tax bill. Take steps now to maximize potential savings.
