Business owners are constantly seeking ways to strengthen their financial bottom line, to gain that little extra competitive edge. The tax code is one place worth looking.
Here the Financial Planning Association (FPA), the nation’s largest group of personal finance professionals, combs through the tax code to provide business owners with tips to maximize the efficiency of their tax returns and bolster their bottom line in the process.
Consult the following list of tips for advice on getting the most tax savings possible for your business.
TIP: Before executing any of the suggested maneuvers that follow, be sure to consult an attorney, accountant and/or financial advisor, suggests certified financial planner Kelly L. MacRae of Beacon Point Advisors in Newport Beach, CA. “It’s a good idea to have an expert help you flesh this tax stuff out, because it can get tricky sometimes.”
TIP: Consider (or reconsider) your company’s legal structure. How a business entity is structured can have major consequences not only on taxes, but also on the personal and financial liability of its owners. To protect owners from liability, says MacRae, consider converting a sole proprietorship to an LLC, LLP or corporation, for example. Also, since retirement plan contribution limits and business tax liabilities (such as FICA, Social Security, employer and employee taxes) often are determined by the legal structure of the business, talk with an attorney or accountant about the type of entity that might fit best with your situation.
TIP: Take advantage of the Section 179 tax deduction that allows businesses to deduct from gross income the entire purchase price of qualifying equipment (computers, copiers, office furniture, certain business-use vehicles, etc.) and other “tangible” business goods, including software, purchased or financed in the year they acquire it instead of depreciating the purchase price over a period of years. The equipment must have been financed/purchased and put into service by Dec. 31, 2014.
If possible, take advantage of this provision in the 2014 tax year, says MacRae, before the maximum deduction drops drastically, from $500,000 (the limit for the 2014 tax year) to the 2015 limit of $25,000. Check out this page of the IRS website for more info about Section 179 deductions: http://www.irs.gov/publications/p946/ch02.html.
For more in-depth business tax tips see our article: Year End Tax Planning-Business
TIP: Weigh which retirement plan is right for your business. From traditional 401(k)s and individual 401(k) plans to SEP IRAs and more, businesses can choose from a range of retirement plans, each of which comes with its own distinct features and tax ramifications. For business owners seeking to maximize tax-deferred retirement plan contributions for themselves and their employees, while maintaining year-to-year flexibility with those contributions, the combination of a 401(k) with profit-sharing often provides the most bang for the buck, according to MacRae. SEP IRAs also hold appeal for the flexibility they provide, as they allow contributions to be made up until the tax filing extension deadline of October 15 the following year.
TIP: Be diligent in tracking, documenting and claiming expenses. From meals and entertainment to automotive expenses and much more, a broad range of business expenses can be claimed to offset income and thus, to reduce tax liability. With automotive expenses, does it make more sense to use the standard mileage deduction or to deduct actual expenses and depreciation? An accountant or financial professional can help answer questions like these.
TIP: Take advantage of other available deductions and write-offs, for home office, charitable donations and more. One worth noting is a provision that allows a business owner to write off 100% of a charitable contribution as advertising if their company logo appears somewhere on the donation recipient’s collateral materials, such as the program for a charitable event held by that organization.
TIP: Track business income over the course of the year and adjust tax payments accordingly. This applies chiefly to business owners who pay quarterly state and federal taxes. Be sure those quarterly payments are in line with income, so you don’t over- or underpay.
Liked these suggestions? Check out this downloadable brochure for more tips on how to save for your business: Financial Planning and Your Small Business.