Smart Tax Moves to Make Right Now
This year’s federal and state income tax returns may be a distant memory, but April 15 will come around again before you know it. Especially if you’re an entrepreneur or small business owner, now is the time to begin gathering your receipts and documents for the year and start organizing them with next year’s returns in mind. Now is also an ideal time to employ strategies that can reduce the pain of tax time next year.
Take a Year-End Assessment
The end of the year is a natural time to take an assessment of where your company stands. Calculate income, tax payments and deductions, and make estimates for the coming year. For instance, depending on your circumstances, you may want to reduce your company’s taxable income, according to Ben Kelley, an attorney and associate licensed tax professional at Tax Defense Network based in Jacksonville, Florida.
“Delay payouts, if possible. If you’re expecting an influx of revenue around the end of the year, you may want to hold off on receiving it until January, if it makes sense for your taxes and your business,” Kelley suggested.
In addition, although the natural inclination is to max out on deductions, sometimes it make sense to or delay taking at least some of them until the next calendar year, according to Rebecca Pavese, a certified public accountant, financial advisor and client service manager and portfolio manager for Palisades Hudson Financial Group, LLC, based in Atlanta, Georgia.
“Consider deferring certain deductions so you can claim them on your 2016 returns. Deferring deductions can help you pay less tax in the long run,” Pavese suggested.
Document Bad Debts for Future Tax Write-Offs
Clients who are slow to pay – or just don’t pay at all put a real dent in your company’s bottom line. The IRS feels your pain. It may be possible to write of at least some of those bad debts as a tax deduction, according to Kelley.
“If you have delinquent payers who have owed your operation for an extended time – and after considerable action by you – you may be able to write them off and take the deductions. As with most deductions, just make sure you have a valid paper trail of your collection endeavors in case any questions arise later on,” he advised.
Consider Making Gifts-in-Kind of Old Equipment
If your company has recently invested in new equipment, you may wonder how to dispose of your old items. If they’re still in good working order, consider making donations to charitable organization through a gifts-in-kind service, advises Gary C. Smith, president of the National Association for the Exchange of Industrial Resources (NAEIR), based in Galesburg, Illinois. Gifts-in-kind organizations match companies with nonprofit organizations like schools, hospitals and churches.
Using gifts-in-kind services saves companies the effort of finding eligible charities and without incurring extra costs. C-corporations can deduct the cost of donated inventory, plus half the difference between cost and fair market value. S-corporations, partnerships, limited liability companies (LLCs) and sole proprietorships qualify for straight cost deductions for donations, according to Smith.
“You don’t need to worry that these wares will not be used as planned and instead sold for profit. Tax codes stipulate that a donated product cannot be resold, bartered or traded, and must be used according to the organization’s mission,” Smith explained.
Reconsider Your Company’s Business Structure
If your company is large, structuring it as a C-corporation occurs almost by default. But many smaller companies could benefit from restructuring to avoid the double taxation imposed on corporations, according to Jeff Socha, senior advisor and founding partner at Ark Financial Group, based in Austin, Texas. Socha also advised company owners and operators to consider how income is structured.
“If they are set up as a C-corp and should be an LLC they might have a 35 percent corporate tax that could be avoided. It’s also worth taking a look at the structure of a small business’ income. If it’s all in wages or W-2 then they are getting hit with self-employment tax that they could avoid if they just took distributions or had their businesses set up to provide them with investment income,” he explained.
Invest in Professional Financial and Tax Advice
No two businesses are exactly alike. What works well for one company could be financially disastrous for another – even if they’re both in the same industry. The money spent on professional accounting and tax advice is a worthwhile investment, even for small operations, according to Kelley.
“Handling taxes is tricky and for a business, it can be volatile – especially if you make a mistake. Before you make any big decisions that you can’t undo, talk with a licensed tax professional. Getting an experienced opinion may be the smartest tax move you make,” he advised.
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