Tax planning is a process of looking at various tax options in order to determine when, whether, and how to conduct business and personal transactions so that taxes are eliminated or considerably reduced.
Pay Your Retirement Accounts First No one has more retirement planning options than those who are self-employed and small business owners. Many small business owners ignore tax planning, and don't even think about their taxes until they're scheduled to meet with their accountant; but tax planning is an ongoing process, and good tax advice is a very valuable commodity. You should review your income and expenses monthly, and meet with your CPA or tax advisor quarterly to analyze how you can take full advantage of the provisions, credits and deductions that are legally available to you.
Tax Planning Strategies There are countless tax planning strategies available to a small business owner. Some are aimed at the owners individual tax situation, and some at the business itself. But regardless of how simple or how complex a tax strategy is, it will be based on structuring the strategy to accomplish one or more of these often overlapping goals: If your taxable income exceeds a threshold of $157,500 for single filers and $315,000 for joint filers, the deduction is reduced pro-rata under the “phase-in rule.” The phase-in is complete when income reaches $207,500 for single filers and $415,000 for joint filers. If you find yourself above these upper thresholds, you unfortunately won’t get the pass-through deduction—period. But making contributions to retirement accounts will reduce your taxable income, and maybe get you back below these income thresholds thereby qualifying your business for the new 20% pass-through tax break. Double Win! If you have commercial real estate, request a tax audit. This will reveal any refunds of over looked tax deductions or over payments you should be able to recapture!
- Reducing the amount of taxable income
- Lowering your tax rate
- Controlling the time when the tax must be paid
- Claiming any available tax credits
- Controlling the effects of the Alternative Minimum Tax
- Avoiding the most common tax planning mistakes
In order to plan effectively, you'll need to estimate your personal and business income for the next few years. This is necessary because many tax planning strategies will save tax dollars at one income level, but will create a larger tax bill at other income levels. You will want to avoid having the right tax plan made wrong by erroneous income projections. Once you know what your approximate income will be, you can take the next step: estimating your tax bracket. The effort to come up with crystal-ball estimates may be difficult and by its nature will be inexact. On the other hand, you should already be projecting your sales revenues, income, and cash flow for general business planning purposes. The better your estimates, the better the odds that your tax planning efforts will succeed. Hidden within the labyrinthine course known as the Internal Revenue Code are valuable money-saving strategies overlooked or undiscovered by many business owners. At the same time there are misleading passages that have been the cause of millions of dollars mistakenly paid to the IRS. Dollars that should have remained in business owners pocket.
Alternative Ways to Save on Business Income Taxes
Maximizing Business Entertainment Expenses
Another interesting way to save on your taxes, that can be fun as well as rewarding to you and your business, is to deduct entertainment expenses. Entertainment expenses are great deductions to add to your taxes and can save you money, however there are some important guidelines to consider when including them on your return. In order to qualify, business must be discussed before, during, or after any meal deducted. The surroundings must be conducive to business discussion. For instance, a small or quiet restaurant would be an ideal location for a business dinner. Be careful of locations that include ongoing floor shows or other distracting events that inhibit business discussions. Prime distractions are theater locations, ski trips, golf courses, sports events, and hunting trips. Starting in 1994, the IRS allows up to a 50% deduction on entertainment expenses. Good documentation of these expenses is required in order for the IRS to consider these deductions. Remember that the business meal must be arranged with the purpose of conducting specific business. Bon appetite!
Important Business Automobile Deductions
An automobile is quite an expense, especially for those of you who own more than one. There is a light at the end of the tax tunnel, though. Recently, the IRS has accepted a new mileage deduction rate (the 15,000 mile annual limit and 60,000 mile maximum limits are no longer in effect). The rates are 36 cents per business mile, 14 cents per charitable mile, and 12 cents per moving/medical mile. Another common way to increase deductions is to include both cars (if you own more than one car) in your deductions. This is possible since the business miles driven determine business use. To figure business use, divide the business miles driven by the total miles driven. You can do this for each car driven for the business and can bring significant deductions.
Stop Ignoring Your Auto Expenses
You may not be aware of this, but you can deduct your auto expenses when used for business. I just had a client leave his employer so he could start his own business. For the first two months after he went out on his own, he tracked his mileage and guess how much of it was for his business? The number was a little more than 90%. If this pace continues for the whole year, he will be able to deduct thousands of dollars because he uses his car for business. What percentage of your car’s mileage is attributable to your business? Whatever the number may be, you can apply that percentage to your auto expenses for the year. For those of you who hate crunching numbers, I’m sorry. I can’t completely remove math from your life. The IRS provides two ways to calculate this deduction.
First, track your actual expenses. Then deduct the percentage of usage that is tied to your business. Second, track your actual mileage and take a tax deduction for those miles. Keep in mind that the rate is 54.5 per mile for 2018. Let’s say you drive a Range Rover (I’m in LA). You pay $1500 per month to lease it and drive 10,000 miles a year of which 80% of that 10,000 is driving for work. Using actual expenses, you would end up spending $18,000 in lease payments for the year plus gas and other maintenance. If you only listed the yearly total of your lease, you would end up with about a $14,400 tax deduction. Compare that dollar amount to if you decided to use the standard mileage rate deduction. That total would only be $4,360! For the Prius driver with a $200 per month payment, the math will be much different. Using the same 10,000 miles a year with 80% of that total used for business, which deduction do you think will be better? Using actual expenses, you would be able to deduct $1,920 plus 80% of gas and maintenance.
On the other hand, if you chose the mileage deduction you would end up with a much larger deduction somewhere in the neighborhood of $4,360. Yes, tracking all of this stuff will take a little time. But how much time would you need to work to earn the comparable tax savings? I’m guessing more time that it will take to track your mileage. There are even apps now to help you do it. This is simply a wonderful way to save, but remember: in order to be effective, a consistent mileage log should be kept. Consider meeting with a professional to determine the most efficient way of tracking mileage and other costs. Happy driving!
Increase Your Bottom Line When You Work At Home
The home office deduction is quite possibly one of the most difficult deductions ever to come around the block. Yet, there are so many tax advantages it becomes worth the navigational trouble. Here are a few common tips for home office deductions that can make tax season significantly less traumatic for those of you with a home office. Try prominently displaying your home phone number and address on business cards, have business guests sign a guest log book when they visit your office, deduct long-distance phone charges, keep a time and work activity log, retain receipts and paid invoices. Keeping these receipts makes it so much easier to determine percentages of deductions later on in the year. The tax laws allows you to immediately expense, rather than depreciate over time, up to $100,000 worth of business assets that you purchase during a year. The key is to purchase it can be new or used. All home office depreciable equipment meets the qualification. Also, if you purchase more than $100,000 in equipment, you can expense the first $100,000 then depreciate the rest. Make sure that before you start deducting all of these items on your return, that you have qualified for the Home Office Deduction. You should consider meeting with a tax professional for further Home Office Deduction advice.
Smart Retirement Income
The world is changing. Look at our debt, our national and international politics, and the economics of all great nations around the world. The government is suddenly saddled with a lot more retirees than they’re used to. But it’s even worse. Unlike business owners, the government never even put any money aside. Ultimately this results in higher taxation. This is not a prediction but a result of plain and simple arithmetic that isn’t a problem that can be solved politically. This is an age demographic issue. Make no mistake about it, our population is aging it's only a matter of time, taxes are going up! Having a Smart Retirement plan will mitigate your exposure to excessive income taxation on your retirement income. A Smart Retirement plan has little if any qualified tax deferred retirement income. The Power of Zero, tax exempt retirement income will eliminate your hard earned retirement income from exposure to excessive income taxation.