Taxes are a constant for any business. They come due every year, whether you have a profitable year or are in times of economic downturn. Planning for your taxes is an important business function, as it allows you to make decisions throughout the year to maximize your tax deductions and save your business on taxes.
Businesses often encounter multiple types of taxes throughout the operating year. These include income taxes, employment taxes like FICA and social security taxes, sales taxes, and excise taxes (only for specific industries). Here are a few measures for saving your business and employees on some of these taxes.
Set Up Your Bookkeeping Process
Establishing a bookkeeping process that properly accounts for income and expenses is essential to every business. Not only do you have to record expenses in the proper category, but you must have proof of those expenses saved in the event of an audit. Mistakes in the bookkeeping process can cost your business money in taxes and fines.
Smart Tax Elections
Certain expenses that require depreciation can also be claimed on an accelerated basis to decrease your tax liability for the year. For example, real estate property your company is letting go of may allow for some tax deductions if there are installment payments for the sale or if a low-value property is abandoned instead of sold.
Defer Income or Accelerate Deductions
Toward the end of the tax year, sending out invoices to clients a few days later can sometimes push back the date the business pays you. This lessens your income for the tax year by pushing it into the next year. In addition, looking into bills due in January and paying them in December is an easy way to increase your expenses. This lowers your taxable income for the current tax year.
Update the Business Structure
The classification you created your business under may not be the best as you continue to grow. Different types of business classifications offer different levels of protection and tax benefits. If your business has grown and you’re still registered as an LLC or sole proprietorship, or S corporation, talk to a trusted tax professional about any benefits of switching to a C corporation.
Increase Employee Benefit Plans
Employee raises are a great way to say thank you for a job well done. Unfortunately, they also come with increased taxes for both the business and the employee. Consider revamping employee benefit plans and contributions when the business is doing well. This could include paying a higher portion of medical, dental, and vision plans, increasing retirement plan match contributions, or even providing a profit-sharing contribution to employee retirement accounts.
Stay Aware of Your AGI
The adjusted gross income for your business and modified adjusted growth income, in some cases, are used to determine your tax rate as well as eligibility for certain tax breaks. Knowing this number can lessen the chance you make a costly mistake in filing your taxes. In addition, you’ll know if you’re on the border of a higher tax rate or missing a tax break when increasing deductions or delaying income could help you.
Keep Current on Tax Law Updates
Tax laws are constantly evolving. Congress passes new acts throughout the year that can update tax law. The IRS also releases clarifications on tax codes that can change how tax professionals and businesses interpret them. Sign up for updates on IRS.gov and check in regularly with your tax professional throughout the year to make sure nothing has changed.
Tax planning is an important step to take for every business that can help them maximize tax deductions and minimize the chance of error when filing their taxes. Reach out to the Friedman + Huey team to discuss your current tax strategy and potential adjustments today.