As foolish this may sound, but every year we have to do what? It’s time for
As a business owner, you have several money-saving strategies to consider before the end of year.
Taxes is one of them and it can have a huge impact on the bottom line.
It’s one of the places that most business owner overlook.
Here are 13 smart and clever tax strategies for business owners.
1. Establish Your Entity Now
January 1 is the ideal time to set up a new set of books and bank accounts. Several states impose franchise taxes and fees that make it very economical and sort of logical to file articles of corporation around the first of the year.
If you currently have a business that owns a lot of equipment and buildings, you can reduce your self-employment taxes by transferring the title of these equipment into a new LLC, while leasing them back to your old LLC.
2. Make an S-election On Your LLC
If you paid too much in self-employment taxes during the year, you can easily elect to be taxed as an S-corporation. Timing is everything.
Make sure you don’t file too early and create a short-year tax return.
Also, the election can be applied retroactively – back to January. Filing of the proper paperwork is affordable and simple. However, you must put yourself on payroll.
You are required to take a reasonable amount of salary for yourself out the company if you make this election. For example, let’s say the LLC has net profit of $250,000 and it would be reasonable to pay you, the owner, a salary of $100,000 if an election to be taxed as an S corporation is made. Without the election, you would pay self-employment tax on $250,000. With the election, the business and the owner each pay FICA only on $100,000.
3. Give Yourself a Salary (Next Year) And Don’t Forget Payroll Taxes
If you made the election above or if you already own an S-corporation, choosing to put yourself on payroll now, it will require you to complete your payroll taxes before year-end. I would suggest you wait until the first quarter of next year to set this up.
If you do it this year and adjust your salary amount based on your net income, it can be flagged by the IRS for potential audit. It can be done, but be smart, be clever, and set up your payroll first thing next year.
Start making projections to how much you can pay yourself next year.
4. Do You Have Kids? Add Them To Your Payroll
Paying your children for bona-fide service they provide for your business is surprisingly overlooked by business owners. This can be a powerful tax-saving tool. Your child can use his or her standard deduction against any income you pay, thus no income taxes.
However, you still have to withhold FICA from all employees on the payroll. That’s okay. You are teaching your children to work and earn their money while starting the clock with the IRS for their social security contributions.
Also, kiddie tax does not apply in this situation – it only applies to passive income. So, follow proper procedures, create bank accounts for your children, and ask them to clean the office, to file documents, and shred old documents.
5. Put Your Spouse On The Payroll
This strategy only works if your spouse gets closer to maximize her contribution to your company’s 401(k) plan. Otherwise, generating earned income for your spouse will do two things. First, it will be subject to payroll taxes. Secondly, the deduction for the salary will end up on your joint return anyways.
6. Put Into Action a 401(k) Before Year-End
You need to carefully consider payroll levels in this strategy. Still, an appropriate implemented 401(k) plan, as you read above, can benefit your future self so much. You can defer up to $53,000 in 2016 as a small business owner.
It’s quite easy to set up, and if you have employees, make sure you cover them on a nondiscriminatory basis.
7. Consider Adding Employee Benefits Instead Of Raises
If you compensate your employees by increasing your contribution to their health insurance premium, it’s one of the best ways I know retain great talent and save taxes at the same time.
Instead of giving a $400 monthly raise where your employee must pay income taxes and both of you would have to pay FICA and Medicare taxes, pay $400 more for their medical insurance. It will eliminate taxes and save money on both sides – it’s a win-win.
8. Write-Off Home Office Expenses
If you qualify for home office deductions, don’t be afraid to take it. Usually, the biggest barrier to qualify for these deductions is that you must use a portion of your home exclusively and regularly for your business.
First, your home office would generally be a separate room excluded from personal activities. Then, after passing the exclusive and regular use test, your home office needs to be a place where you regularly meet with clients or conduct all of your administrative and management tasks. Here is a link for the IRS website on this subject.
9. Got Some Extra Cash? Buy Stuff
Under certain conditions, you may qualify to elect Section 179 and expense the entire cost of your equipment in the year it is placed in service.
Also, if the asset is brand new, you may qualify to take the 50% bonus depreciation. Making either election, accelerates your deductions and gives you immediate tax benefit for your cash out.
10. Need Some Extra Cash? Sell Stuff
Selling property under the installment method means that the gain will spread over the periods you receive the installments. Also, if you currently have losses in your business, you can elect to report the full gain in the year of the instalment sale to offset some of the losses.
You are going to receive cash payments later while harvesting your current losses for tax purposes.
11. Push Income or Expenses To The Proper Year
Typically, you would want to push income to the next year and accelerate expenses to the present year. However, this get tricky with higher tax rates. Your goal is to try to stay under certain higher marginal tax brackets.
It’s imperative to have suitable set of books to make informed and accurate decisions. Near the end of the year, send your customer’s bills a little later so you get paid in January. Similarly, if you have bills to pay that are due in January, pay them before the end of December so you can take the deductions during the current year.
12. Don’t Overlook Carryovers
This is done automatically by tax preparation programs. Yet, clever business owners know that there are certain limitations that prevent them from fulling using these carryovers in the current year.
So, plan well, plan ahead, and keep track. These carryovers can be capital losses, charitable contribution deductions, general business credits, home office deduction, and net operating losses.
13. Have You Thought About a C-corporation?
While there is nothing wrong with the structures mentioned above, you might be able to gain tax advantages by structuring your company as a C corporation.
With current enacted tax laws, the first $50,000 of your income is taxed at a rate of 15 percent as opposed to a 35 percent rate if you’re in the highest tax bracket
Your focus SHOULD NOT BE in avoiding to pay taxes. Your focus is to grow your business while keeping most of your profits. It’s much better and much more fun to focus on keeping 75% of your $500,000 profit instead of paying 15% taxes on $100,000.
The understanding of taxes is one of many ways successful business owners use to grow their business. You can lessen the amount of taxes you pay if you enjoy the benefits of tax breaks and opportunities that are out there.
It’s up to you (and your tax advisor) to find them!
Any other ideas you would like to share with us?