The end of the year is approaching fast, and when tax time comes many businesses will be wondering how they could have paid less. If your business is one of them, now is the time to start thinking about the coming year, and what changes you could make to reduce your bill next time the taxman comes around. Here are several options to consider.
CHECK YOUR CORPORATE STATUS
Changing the taxable structure of your business is not an every-year event, but if your business has grown, shrunk, or otherwise changed in some way, it may behoove you to consider adjusting your business type to take advantage of various taxation options. The tax burdens on a sole proprietorship, an LLC, an S-Corp and a C-Corp can be significantly different, and the paperwork associated with a change can be well worth it when it comes to tax time.
GIVE YOUR EMPLOYEES MORE BENEFITS RATHER THAN A STRAIGHT WAGE INCREASE
When you increase your employees’ wages (i.e., give them a raise), you concurrently expose yourself to more W-2, FICA, and Unemployment taxes. When you increase employee benefits, on the other hand, you increase their compensation without increasing the business’s tax burden. So when increasing employee compensation, consider whether you can do so in lieu of wage increases, or as an adjunct to a partial wage increase. Depending on an employee’s individual situation, they may see improvements in their health insurance, increases in their educational assistance, transportation benefits, dependent care assistance, or any of a variety of IRS-allowed fringe benefits as equivalent or better than a direct increase in wages.
USE CONTRACT EMPLOYEES WHERE FEASIBLE
Maintaining full-time employees requires you to pay unemployment and other taxes, whereas using contractors to fulfill certain areas of work generally places the tax burden on the contractor. Finding, hiring, and paying third parties to fulfill specific aspects of your business process is becoming ever-easier via the internet (including for financial process outsourcers like Bookkeeping Express). Don’t hesitate to use such third-party resources if they make sense for your business, but at the same time make sure you are not classifying workers as 1099 contractors that the IRS would consider W-2 employees.
ESTABLISH ACCOUNTABLE PLANS FOR EMPLOYEE REIMBURSEMENT
During the course of the tax year, you will likely need employees to make purchases or cover expenses for which the business will later reimburse them. The best way to do this, from a taxation perspective, is to adopt accountable plans. By setting up these plans, you will be able to reimburse employees without counting those expenses towards W-2 income nor requiring you to pay FICA and unemployment taxes on them.
INVESTIGATE TAX CREDIT OPPORTUNITIES AND MAKE USE OF THEM
Businesses often focus on how much they can identify in deductions but overlook opportunities for tax credits. There are a variety of federal tax credits that your business may be eligible for. There will be a limit to the tax credits you can receive in any given year, but in that case, you may have the option to apply the excess retroactively to previous tax years, or to carry it forward to future tax years.
DON’T FORGET ABOUT CARRYOVERS
It’s important to always keep up with your year-over-year carryovers. In previous years you may have had more charitable contributions, net operating losses, or capital losses than you could legally claim, and you should have had the opportunity to carry over some or all that excess to future years. Now that those future years are here, be sure that you have kept track of those carryovers and are applying them to full effect in the current tax year. This should automatically be done by your accountant or accounting software but be sure you are double checking.
INVEST IN MARKETING
Your marketing budget is tax deductible, so be sure to spend as much as possible as long as you see a measurable return. You don’t want to spend on useless marketing efforts simply to get a “deduction”, but you shouldn’t hesitate to invest in any marketing opportunity that promises a positive return on investment. Not only will you expect to see a measurable improvement in your business, but at the same time you will get the added bonus of watching your tax bill go down.
PREPAY UPCOMING PLANNED EXPENSES
As the tax year nears its end, if you are still looking for ways to reduce this year’s tax burden – or your tax bracket if you are a sole proprietorship or pass-through business – consider identifying expenses you already plan to incur over the coming year and see if you can bundle and prepay for them this year. By moving and paying as much as you can before this year’s end, you can potentially move the tax benefits of next year’s expenses to this year’s filing.
Businesses are always looking for ways to reduce their tax burden. We’ve covered several things that have helped many of our clients do so over the years. Don’t hesitate to ask your accountant or bookkeeper whether these suggestions would help in your specific case.