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The major objective for most people in business is to maximize the return from the business venture. Cutting your taxes will help you achieve that goal.
Review these tax tips; then contact us for assistance in identifying and implementing the best strategies for you.
1. Give careful consideration to the legal form of doing business. The tax and nontax consequences of the form in which you do business are significant. The basic forms of operation from which to choose include sole proprietorship, partnership, corporation, or limited liability company.
Seek professional assistance before making your decision, and review your chosen business form from time to time to see if it's still appropriate.
2. Consider "Section 1244" stock for a new business. If you're starting a business and choose to operate as a corporation, investigate the advantages of Section 1244 stock.
There are requirements that must be met, but if your stock qualifies and your business later fails, you can deduct annually up to $100,000 of the loss against ordinary income ($50,000 on a single return).
Without the Section 1244 benefit, your stock loss offset against ordinary income would be limited to $3,000 annually.
3. If you operate in corporate form, keep accurate and thorough minutes for the corporation. The small effort this requires will payoff handsomely if the IRS audits you. Minutes should document transfer of funds or assets into or out of the corporation, officers' salaries, shareholder dividends, officer and employee benefits, and related-party transactions that might be scrutinized by the IRS.
4. Elect S corporation status. If your sole proprietorship or partnership is producing a net profit in excess of a reasonable compensation for your time, you could save money by incorporating and electing S status.
You're required to take a reasonable wage for the work you do but no more than that. If reasonable compensation for what you do would be $20,000, for example, there is little point in paying social security tax on more.
If you incorporate and elect S status, the salary you take will be subject to both income and payroll taxes. The profits above that amount are subject to income tax but not payroll taxes.
5. Switch your regular corporation to an S corporation. If your business operates as a regular corporation (known as a C corporation), investigate the tax advantages of electing S corporation status.
A C corporation pays taxes on its income, and shareholders are taxed on corporate income a second time when it is distributed to them (usually in the form of dividends).
In an S corporation, corporate income is taxed only once. Individual shareholders report the corporate income on their indIvidual tax returns. In deciding whether a C or S corporation is better for your business, you must compare current corporate and individual tax rates.
6. Review your S corporation basis. If you operate your business as an S corporation, be sure that you have a large enough tax basis to deduct any losses sustained by the company.
7. Hire your children to work in your business. Wages paid will be deductible by your company and taxable to the family member. Your child's earnings will probably fall in a lower tax bracket than yours.
Payroll taxes apply to such wages; however, if your business is a proprietorship or family partnership, they do not apply to wages paid to your children under 18.
Compensation paid has to be reasonable for the services performed.
8. Never use the Internal Revenue Service as your banker. When cash flow is tight, you may be tempted to pay your suppliers first and payroll taxes to the IRS last. The IRS will take steps to minimize the liability as quickly as possible.
Pay the IRS first. If you absolutely cannot, contact your local IRS office before they contact you.
9. Keep good records for all business travel, meal, and entertainment expenses. Travel that you do in conjunction with your business is deductible, but business meal and entertainment expenses are only partially deductible.
10. Time equipment purchases carefully. It may no longer be good strategy to make business equipment purchases late in the year. Under current law you are required to adjust depreciation if you make a large percentage of your equipment purchases in tlie fourth quarter of the year.
11. You are allowed to expense a certain amount of equipment costs in the year of purchase. The write-off for business cars, however, is limited to allowable first-year depreciation. If your total equipment purchases exceed $200,000, the expensing op tion phases out.
12. Consider a tax-free exchange if you plan to sell a piece of business property and replace it with other business or investment property. On
a qualified exchange, current tax liability is deferred until you dispose of the new property.
13. If you couduct busiuess from your home, become familiar with the rules for home office deductions. Accurate records may preserve your deduction.
14. Give gifts to employees, customers, and clients, and take a deduction on them. Such gifts cannot exceed $25 each.
15. Review your corporate income before year end. If you operate your business as a personal service corporation (a tax definition that applies to taxpayers performing services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting), be aware that such corporations now pay a flat 35% on all taxable income.
Compare this rate with individual rates before deciding whether to pay oult all income as salaries or bonuses.
16. Keep repairs separate. Ordinary repairs and maintenance on business equipment and buildings are deductible business expenses. Improvements which materially add to the value of the property or significantly prolong its useful life must be depreciated over a period of years.
To avoid losing tax deductions for repairs and maintenance, make major improvements completely apart from general repairs and maintenance.
17. Review your inventory at year-end. The lower your inventory, the lower your net profit. You are not permitted to undervalue your inventory or to state a lower inventory than you have. You are permitted, however, to write inventory down to a reduced valuation which you can substantiate.
Identify any obsolete or unsalable items and write them off. Check the rules for disposing of such inventory.
18. Don't miss business tax credits that are still available. Congress often uses tax credits to encourage certain activities. Regularly investigate those credits that might be available to your business.
19. If you're self-employed, consider a Keogh retirement plan. It can cut your current tax bill and provide you with retirement income.
A Keogh plan must cover your employees as well. Keoghs must be established by December 31st of the tax year in which you want to take a deduction for a contribution.
20. If you're a small business, cosider a SEP or a SIMPLE. Small businesses often find pension and profit-sharing plans and even Keoghs too complicated and costl to set up and administer. A SEP (Simplified Employee Pension plan) or a SIMPLE (Savings Incentive
Match Plans for Employees) may be the answer.
These two kinds of retirement plans were designed specifically for small businesses.
21. Don't overlook an IRA to cut our current taxes and save for your tirement. Many people still qualify for a ductible contribution.
22. Don't subject yourself to tax penalties by misclassifying an employee as an independent contractor. The IRS is aware that employers prefer to treat workers as independent contractors to avoid paying fringe benefits and payroll taxes. If you're not absolutely sure how to treat a given worker, contact us.
23. Avoid the alternative minim tax. If it cannot be avoided, you may be abIe to use it to your advantage in a given year. But you must know where you stand before year-end and give yourself time to execute tax-saving strategies.
24. Use your tax advisor wisely. We can best serve you by assisting you in carefully planning your important financial moves so they're structured to minimize taxes. PIease check proposed transactions with us before you complete them.
Contact our office if you'd like details or assistance with any tax concerns. We're here to help.
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