Tax Planning Basics For Businesses
Recently, I posted information on tax planning for individuals. Tax planning isn’t just for individuals—it is just as important for businesses. The holidays are upon us and so is the tax filing season. It’s as good a time as any to think about what you can do to reduce your tax burden for the current year.
This is especially true for businesses. Eleven months of the year have passed, and you should be able to accurately calculate what the rest of the year will be like.
However, end-of-year is not the best time to plan for your taxes. If your business uses a fiscal year-end (not December), you want to focus on fourth quarter to start your tax planning. However, it is never too late or too early to start.
Don’t be alarmed! The good news is there are plenty of simple, fast things you can do to ensure you owe the least amount of tax possible.
Tax planning for businesses
Tax planning for businesses, not surprisingly, is more complicated than it is for individuals. That also means there are lots of opportunities to lower your company’s tax burden.
Know what you can deduct
Before getting into ways you can lower your tax burden, it is best to understand what it is you can deduct. Here are some examples
- Anything you purchase that is necessary for your business
- Out-of-pocket travel expenses to meet with clients, attend a conference, or conduct any related business. This includes transportation expenses, such as airline tickets, mileage on your car or actual vehicle expenses if you drive, rental car expenses, and meals out of town
- Training related to your business or the operation of your business
- Meals with clients, as long as you discuss business
- Supplies
- Payroll and related taxes
- Taxes
- Insurance
- Start-up costs
- Depreciation and amortization
- Advertising/marketing
- Bank fees
- Professional fees
- Other things may be deductible as well. Check with your tax professional
Now, here are some ways you can reduce your tax burden.
Invest in equipment
Anything you buy that is necessary for your business—a tractor for a farm, a new computer for a website design firm, a pickup truck for a landscaping service—is tax deductible for the current year if it is bought and put into service by year-end.
The operative term is “put into service.” For example, for the farm that needs a tractor, it’s not enough to order the equipment. You have to receive it by the end of the year and start using it. That, of course, requires planning.
It’s easier for service businesses like a website designer, accountant, or lawyer to buy necessary equipment and put it to use.
No cash? No problem. A bank loan or credit card purchase is considered cash and equipment and other purchases paid by these means are deductible.
Though it may be tempting to buy a piece of equipment and claim the deduction on this year’s tax return, it’s important to actually think about next year. Ask yourself “What will this purchase do to my company’s cash flow?” If it will present a burden, the best advice is to forego the effort to lower your taxes and keep the cash for running your business. Don’t let your desire to lower your taxes override a good business decision.
Invest in your employees
Though it may sound cliché, your employees are your most important asset. So why not reward them and lower your tax burden at the same time? Offering bonuses or starting or increasing your contribution to their retirement accounts are expenditures that count against your income and therefore lower your taxes.
Again, the same truth holds for this type of investment. If your generosity to your employees will strap your business and jeopardize their employment for next year, don’t use these options to lower your tax burden. Having a paycheck later is more valuable to your employees than a bonus now.
Document everything
Say you flew across the country to attend a trade show. You met lots of great contacts. You took existing clients out to dinner and discussed future ventures. Come tax time, you’re going to deduct all those expenses, right? Yes. However, if you take these deductions but cannot substantiate them in the event of an audit, the IRS may disallow them. By keeping receipts (a credit card statement alone does not qualify) and other forms of proof, you’ll be covered for these deductions if an audit occurs.
Documenting your spending really isn’t difficult. It can be as simple as saving the receipts as noted above. Here are some other tips.
If you drive to meet a client, record the trip. You can use an app like MileIQ, enter the information in whatever accounting software you use, on a spreadsheet, or even record it in a notebook noting the miles to and from the meeting place
Though you may have receipts for dinners and airline travel, it’s important that you document those, too. For one thing, it’ll make the process of preparing your taxes easier
On the receipt for meals, document with whom you met and the topic of discussion
You can log all of these expenses and keep your receipts in a tidy file or box in the event of an audit. You can also keep these receipts digitally.
Things that are not deductions
Not everything that lowers your bottom line is a tax deduction. This is especially true for self-employed individuals and partnerships. For example, paying yourself is not a deduction. Although it is part of the cost of doing business, you would take a draw instead of a paycheck. The draw will be deducted from your equity whereas an employee paycheck is deducted as an operating expense.
Partnerships are a little different. If one or more partners receive a guaranteed payment, this is considered an operating expense. However, these guaranteed payments are income for someone who is self-employed. That topic alone is worth another blog post.
Though this list is not exhaustive, here are some examples of things that are not deductible:
Health insurance for the owner
- Charitable contributions
- Clothing
- Manicures and makeup
- Vehicle expenses and mileage expense for the same vehicle
Start planning
If one of your financial goals is to lower your tax burden, it’s important to talk to your tax preparer and/or your financial advisor and to act. It’s never too early to start tax planning.