10 TOP TAX PLANNING STRATEGIES

 

With tax season just around the corner, here are ten common, and effective tax strategies for business owners:

 

1) Keep good, up-to-date accounting records so you know where you are at the end of the year. Without, good records it is difficult to do intelligent tax planning!
 

2) Defer business income to next year and accelerate business expenses, when practical, into the current year.

 

3) Start a business! Businesses offer deductions for things like travel, car use, depreciation, office supplies, travel, vacations, equipment & furniture and other items used for ordinary and necessary business use. However, the business does need to be carried on with the expectation of being profitable.
 

4) Don't be surprised by self-employment taxes! I refer you back to #1 above (keep good records). You may make a rough estimate that you have no income tax because of high itemized deductions. However, net income from a Schedule C business (sole proprietorship) is still subject to the 15.3% tax, starting in 2013. Consider using rent to business owners as income, if reasonable and appropriate, to avoid compensation-related tax, i.e. the self-employment tax. //See this link for more info on the self-employment tax:
http://www.irs.gov/publications/p225/ch12.html
  

5) Maximize unrealized income. To accumulate wealth and reduce the tax bite, invest in assets that produce income that is not currently taxable. The tax laws operate on the realization principle, where gains are not taxed until the property is sold/disposed of, or realized. Therefore, investments in real estate, rare coins & art, stocks and other investments can delay taxes while they appreciate in value. 

 

 

6) Be aware that there are restrictions on depreciation allowed for listed property (property that is typically used for personal use) like cars, boats. computers, etc. used primarily for personal use. Also, use accelerated depreciation such as the the Section 179 and bonus depreciation deduction, when allowable. See the following link for more information on the Section 179 and bonus depreciation write-off:
http://www.section179.org/section_179_faqs.html
  

7) Consider estate and gift tax issues, especially in closely-held companies. Also, consider the possibility of splitting income among family members, especially to those with lower tax rates.

 

8) Consider and select the best legal form of doing business in your situation.
The decision should be considered carefully with your tax adviser. Some issues to consider are simplicity, flexibility, pass-through of business profits, centralization of management, free transferability of ownership interests, reporting requirements, limited liability, number of owners allowed, ease of selecting a fiscal year end, self-employment taxes, and double taxation of earnings.   

 

9) Use the home office deduction, if you qualify, to allocate the home office portion of your home's expenses to your business. Examples of indirect expenses that can be allocable to home office use include home mortgage interest, real property taxes, homeowners insurance, and general home repair.  Check out this link for more information on the home office deduction:  http://www.irs.gov/Businesses/Small-Businesses-%26-Self-Employed/Home-Office-Deduction

 

10) Use auto expenses effectively. As noted previously, business owners can deduct business use of a car. Costs are divided between local transportation (commuting is not allowable) and overnight travel expenses. You can elect to take either actual car expenses or the standard mileage rate, which was 56.5 cents/mile in 2013 and 56 cents/mile in 2014 for business miles driven. The rules for car expenses are complex and require good records.