Many small businesses miss out on legal deductions that they are not aware of. Or, they have not planned appropriately in which case they are not eligible for tax savings. When you outsource your bookkeeping, accounting, and tax prep to Exigo Business Solutions in the Kansas City area, we will work with you at the start of the year to make sure that you take advantage of every strategy throughout the year to reduce what you pay quarterly and what you pay at the end of the year. Here are our 9 tips.
Making strategic decisions about how to treat business expenditures can save money in your taxes and lighten your burden for payments over time. As an example, you can deduct the cost of new equipment and machinery in full. Under the 2018 law the cap for this deduction went up to $1 million. However, if you are just starting up, you may want to depreciate these items over the years. We can tell you which will result in a better tax result and which will make your cash flow more manageable. If you are not making much of a profit yet, you may choose depreciation so that you have deductions to declare when your income is higher.
If you experienced disaster losses during the year, you may choose to claim losses on returns from previous years when your income was higher than during the last year when so many businesses experienced losses due to the pandemic. And, if you pay for insurance, it should be deducted such as with the following.
• Business Interruption Insurance
• Workers’ Compensation Insurance
• General Liability Insurance
• Commercial Auto Insurance
However, if your business is registered as a sole proprietorship, a single person LLC, or separate entities check with us to make sure which insurances you can deduct.
Additional taxes, limitations, and tax breaks commonly are tied to your adjusted gross income or modified adjusted gross income. If your adjusted gross income does not exceed $200,000 for a sole proprietorship or $250,000 if you file taxes jointly, you can avoid the extra 0.9% Medicare tax. Even though many tax cuts were passed in 2019, this one survived.
When you reimburse employees for travel, tools, entertainment, and other expenses, make sure that your plan meets the requirements of the IRS. Such a plan is called an accountable plan. You deduct the expenses but do not report reimbursements as employee income. This can reduce the employment taxes that you pay and lower your overall tax burden. Because employees can no longer deduct miscellaneous expenses that were not reimbursed, they will do better as well with an accountable plan.
Many credits and deductions have limits during a given year. But, many also can be carried over into subsequent years. At Exigo Business Solutions, when we do your taxes and help with planning, we track such potential deductions so that you never miss a carryover. The main ones that you should miss out on are the following.
• Capital losses
• General business credits
• Net operating losses which are limited to 80% of taxable income
• Charitable contribution deductions
• Home office deduction
Although distributions, bonuses, and your salary are always taxable, there are benefits you can take that do not trigger taxes. For example, your business can loan you money for a low (or no) interest rate. There are IRS rules governing this arrangement but it can be beneficial. Also, medical coverage, health savings accounts, and retirement plans are common “fringe benefits” that are tax-free. There are others that may or may not be applicable depending on your circumstances. Contact us at Exigo Business Solutions for help with this.
Your employees will be happy if you give them tax-free fringe benefits. And, because many of these are not taxable, you will reduce your employment tax burden if you do this in lieu of paying higher salaries. Examples include the following.
• Disability insurance
• Educational assistance
• Transportation benefits
• Employer-sponsored health insurance
• Group term life insurance
• Dependent care assistance
• Long-term care insurance
• Meals provided for employee convenience
Abandon Property Instead of Selling It
If you have property that is of no value to your business, you may be considering selling it. We can help you decide if simply abandoning it is a better choice. This is because of the difference in tax treatment between a capital loss when you sell it and an ordinary loss when you abandon it. Abandonment gives you a fully deductible ordinary loss while a capital loss may be limited.
Setting up an employer-sponsored 401 (k) is a nice benefit for your employees. Your contributions are tax-deductible and such plans are easier to operate than old-style defined benefit plans. Ask us for help in setting up such a plan as your choice of plan will vary according to your circumstances. You may qualify for a tax credit as well when setting up the plan.
Although you want to plan for your taxes at the beginning of the year, there are actions you can take at the end of the year that will result in tax savings. A good example is to delay billing for work that has not been paid for until you receive payment. When your business works on a cash basis, you will have reduced your tax burden for the year just ending. Another example is to time purchases for fixed assets for the end of the year and immediately claim depreciation. This also reduces your current year taxes. If you have assets listed on your books, they can revalued as well which allows you to increase the depreciation that you claim.
A good time to write off bad debts is also at the end of the year. We will be able to tell you if this can be done for a specific customer and specific debt as specific rules apply.
And, when you outsource your taxes to us at Exigo Business Solutions, your quarterly payments and year-end tax submission will be done properly and on time. The last thing you need is to be dealing with penalties as well as sloppy tax planning and prep!
Many small businesses start out as a sole proprietorship. But, with time a different business structure may be more appropriate and cost-effective, especially in regard to taxes. For example, an LLC (limited liability company) can be used as a “pass through entity” that is very flexible in terms of tax treatment for business income. It can be taxed as an S corporation where you pay yourself a reasonable salary, subject to FICA taxes. The remainder of your LLC income “passes through” as a distribution and is not subject to FICA taxes. The trade-off is that you may be shorting yourself when it comes to social security payments at retirement. This is the sort of issue that you need to discuss with a trusted accountant.
The “take home lesson” is that when you have competent help with your taxes you can reduce what you pay each year and make your business more successful in the long run. For more help with reducing your tax burden, contact us at Exigo Business Solutions in the Kansas City area.