Tax planning is probably something business owners think about twice a year: when the return is being prepared and possibly at the end of the year. This, however, is short-sighted. Now is a great time to evaluate your tax situation and implement some strategic measures. We suggest five approaches worth considering.
1) Review Income Tax Payments – If your model is to pay income taxes on business profits through estimated taxes, you have two more times to get it right: September 15, 2017 and January 16, 2018. Review the amounts with your accountant to prevent overpaying—why offer the government an interest-free loan? Then there is underpaying, which can cause costly tax interest and/or penalties. Remember that estimated taxes include not only regular income taxes (including the alternative minimum tax) but may also include:
- Self-employment tax
- .9% additional Medicare tax on earned income
- 3.8% additional Medicare tax on net investment income
2) Assess Your Profitability – Consider a few strategies to boost tax savings if 2017 is revealing itself to be a solid year for you:
- Buy Equipment. In 2017, you can expense up to $510,000 worth of equipment purchases (even if you finance them) instead of depreciating the cost over a number of years. This amount is phased out dollar for dollar to the extent your eligible property exceeds $2,030,000.
- Hire Wisely. As you increase your staffing, bear in mind that the work opportunity credit rewards you for hiring someone from a targeted group, such as a qualified veteran.
- Create a Qualified Retirement Plan. You can cut your current tax bill through contributions to a qualified retirement plan. There are several plan options, and the one to choose depends on whether you have employees and how much of the contributions the business can afford to shoulder.
3) Issue Stock – If you’re a qualifying C corporation (with gross assets less than $50 million in addition to other restrictions) in manufacturing, technology, retail or wholesale, you may qualify to issue stock (referred to as a small business stock, or Section 1202 stock) that will permit the shareholder to eventually obtain tax-free treatment for any capital gain. If you issue the stock now and it’s held for more than five years, then all of the gain is tax free. The stock must be acquired in exchange for cash, property or services (not received through a gift or inheritance). It can be used to bring in new investors or reward employees.
4) Meet With Your Tax Advisor – Most small business owners use CPAs or other tax advisors to prepare and file their returns. These professionals also can serve as business advisors throughout the year, offering guidance on what businesses can do to maximize profitability while minimizing taxes. Schedule a meeting to review your profits and losses, and craft a tax plan with current information, while also considering projections and past performance.
5) Expand Your Research and Development (R&D) – It’s not only big companies like drug manufacturers and technology companies that invest in R&D. Whether you engage in R&D to develop a product or to identify new methods for your operations by, for example, creating internal software, you may qualify tax credits. This could help to underwrite the cost for the research.
A “qualified small business” can choose to use the credit as an offset to the employer’s share of Social Security taxes (up to $250,000) rather than using it against income taxes. Businesses that qualify are those with less than $5 million in gross receipts for the current year and no gross receipts for any year preceding the fifth year prior to the current year. For example, a business with $4 million in receipts in 2017 and no gross receipts prior to 2012 may use this option.
In summary, the key takeaway here is to prevent missing an opportunity to review your tax position and determine the strategies you can use between now and the end of the year to optimize your 2017 tax bill.
Do you have questions about how to approach midyear tax-saving strategies? Please contact Jim Forbes at 440-449-6800 or firstname.lastname@example.org.