What is Tax Planning?

Tax planning is the process of looking at various tax options to determine when, whether, and how to conduct business transactions to reduce or eliminate tax liability.

Many small business owners ignore tax planning. They don’t even think about their taxes until it’s time to meet with their CPAs, EAs, or tax advisors but tax planning is an ongoing process, and good tax advice is a valuable commodity. It is to your benefit to review your income and expenses monthly and meet with your CPA, EA, 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

Countless tax planning strategies are available to small business owners. Some are aimed at the owner’s 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:

• 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 very 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 are, the better the odds that your tax planning efforts will succeed.

Here are three examples where tax planning pays for most small business owners:

Maximizing Business Entertainment Expenses

Entertainment expenses are legitimate deductions that can lower your tax bill and save you money, provided you follow certain guidelines.

In order to qualify as a deduction, business must be discussed before, during, or after the meal and the surroundings must be conducive to a business discussion. For instance, a small, quiet restaurant would be an ideal location for a business dinner. A nightclub would not. 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.

The IRS allows up to a 50 percent deduction on entertainment expenses, but you must keep good records, and the business meal must be arranged with the purpose of conducting specific business. Bon appetite!

Important Business Automobile Deductions

If you use your car for business such as visiting clients or going to business meetings away from your regular workplace you may be able to take certain deductions for the cost of operating and maintaining your vehicle. You can deduct car expenses by taking either the standard mileage rate or using actual expenses (more about this below). In 2017, the mileage reimbursement rate is 53.5 cents per business mile (up from 54 cents per mile in 2016).

If you own two cars, another way to increase deductions is to include both cars in your deductions. This works because business miles driven is determined by business use. To figure business use, divide the business miles driven by the total miles driven. This strategy can result in significant deductions.

Whichever method you decide to use to take the deduction, always be sure to keep accurate records such as a mileage log and receipts. If you need assistance figuring out which method is best for your business, don’t hesitate to contact the office.

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 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 business 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.

Section 179 expensing for tax year 2017 allows you to immediately deduct, rather than depreciate over time, up to $510,000, with a cap of $2,030,000 worth of qualified business property that you purchase during the year. The key word is “purchase.” Equipment can be new or used and includes certain software. All home office depreciable equipment meets the qualification. Some deductions can be taken whether or not you qualify for the home office deduction itself.

Tax Avoidance is Legal, Tax Evasion is not

Although tax avoidance planning is legal, tax evasion – the reduction of tax through deceit, subterfuge, or concealment – is not. Frequently what sets tax evasion apart from tax avoidance is the IRS’s finding that there was fraudulent intent on the part of the business owner. The following are four of the areas the IRS examiners commonly focus on as pointing to possible fraud:

1. Failure to report substantial amounts of income such as a shareholder’s failure to report dividends or a store owner’s failure to report a portion of the daily business receipts.
2. Claims for fictitious or improper deductions on a return such as a sales representative’s substantial overstatement of travel expenses or a taxpayer’s claim of a large deduction for charitable contributions when no verification exists.
3. Accounting irregularities such as a business’s failure to keep adequate records or a discrepancy between amounts reported on a corporation’s return and amounts reported on its financial statements.
4. Improper allocation of income to a related taxpayer who is in a lower tax bracket such as where a corporation makes distributions to the controlling shareholder’s children.

If you’re ready to meet with a tax professional to discuss tax planning strategies for your business, call the office today.

• By Leon Clinton
• October 10, 2017

If you’re looking to save money on your taxes this year, consider using one or more of these tax-saving strategies to reduce your income, lower your tax bracket, and minimize your tax bill.

Max Out Your 401(k) or Contribute to an IRA

You’ve heard it before, but it’s worth repeating because it’s one of the easiest and most cost-effective ways of saving money for your retirement.

Many employers offer plans where you can elect to defer a portion of your salary and contribute it to a tax-deferred retirement account. For most companies, these are referred to as 401(k) plans. For many other employers, such as universities, a similar plan called a 403(b) is available. Check with your employer about the availability of such a plan and contribute as much as possible to defer income and accumulate retirement assets.

Tip: Some employers match a portion of employee contributions to such plans. If this is available, you should structure your contributions to receive the maximum employer matching contribution.

If you have income from wages or self-employment income, you can build tax-sheltered investments by contributing to a traditional (pre-tax contributions) or a Roth IRA (after-tax contributions). You may also be able to contribute to a spousal IRA even when your spouse has little or no earned income.

Tip: To get the most from IRA contributions, fund the IRA as early as possible in the year. Also, pay the IRA trustee out of separate funds, not out of the amount in the IRA. Following these two rules will ensure that you get the most tax-deferred earnings possible from your money.

Take Advantage of Employer Benefit Plans Such as Flexible Spending Accounts (FSAs) or Health Spending Accounts (HSAs)

Medical and dental expenses are generally only deductible to the extent they exceed 10 percent of your adjusted gross income (AGI). For most individuals, particularly those with high income, this eliminates the possibility for a deduction.

However, you can effectively get a deduction for these items if your employer offers a Flexible Spending Account (sometimes called a cafeteria plan). These plans permit you to redirect a portion of your salary to pay these types of expenses with pre-tax dollars. Another such arrangement is a Health Savings Account. Ask your employer if they provide either of these plans.

Bunch Your Itemized Deductions

Certain itemized deductions, such as medical or employment-related expenses, are only deductible if they exceed a certain amount. It may be advantageous to delay payments in one year and prepay them in the next year to bunch the expenses in one year. This way you stand a better chance of getting a deduction.

Use the Gift-Tax Exclusion to Shift Income

In 2017, you can give away $14,000 ($28,000 if joined by a spouse) per donee, per year without paying federal gift tax. And, you can give $14,000 to as many donees as you like. The income on these transfers will then be taxed at the donee’s tax rate, which is in many cases lower.

Note: Special rules apply to children under age 18. Also, if you directly pay the medical or educational expenses of the donee, such gifts will not be subject to gift tax.

For gift tax purposes, contributions to Qualified Tuition Programs (Section 529) are treated as completed gifts even though the account owner has the right to withdraw them. As such, they qualify for the up-to-$14,000 annual gift tax exclusion in 2017. One contributing more than $14,000 may elect to treat the gift as made in equal installments over the year of gift and the following four years so that up to $56,000 can be given tax-free in the first year.

Consider Tax-Exempt Municipal Bonds

Interest on state or local municipal bonds is generally exempt from federal income tax and from tax by the issuing state or locality. For that reason, interest paid on such bonds is somewhat less than that paid on commercial bonds of comparable quality. However, for individuals in higher brackets, the interest from municipal bonds will often be greater than from higher paying commercial bonds after reduction for taxes. Gain on sale of municipal bonds is taxable, and loss is deductible. Tax-exempt interest is sometimes an element in the computation of other tax items. Interest on loans to buy or carry tax-exempts is non-deductible.

Give Appreciated Assets to Charity

If you’re planning to make a charitable gift, it generally makes more sense to give appreciated long-term capital assets to the charity, instead of selling the assets and giving the charity the after-tax proceeds. Donating the assets instead of the cash prevents your having to pay capital gains tax on the sale, which can result in considerable savings, depending on your tax bracket and the amount of tax that would be due on the sale. Additionally, you can obtain a tax deduction for the fair market value of the property.

Tip: Many taxpayers also give depreciated assets to charity. Deduction is for fair market value; no loss deduction is allowed for depreciation in value of a personal asset. Depending on the item donated, there may be strict valuation rules and deduction limits.

Tip: Taxpayers age 70 1/2 and older can take advantage of tax benefits associated with Qualified Charitable Distributions (QCDs)–IRA withdrawals that are transferred directly to a qualified charitable organization.

Keep Track of Mileage Driven for Medical or Charitable Purposes

If you drive your car for medical or charitable purposes, you may be entitled to a deduction for miles driven. For 2017, it’s 17 cents for medical and moving purposes and 14 cents for service for charitable organizations. You need to keep detailed daily records of the mileage driven for these purposes to substantiate the deduction.

If you are Self-Employed…

As a self-employed business owner you can also take advantage of additional tax saving strategies such as:

Special Deductions and Tax Credits

You may be able to expense up to $510,000 ($500,000 adjusted for inflation) in 2017 for qualified equipment purchases for use in your business immediately instead of writing it off over many years. Additionally, self-employed individuals can deduct 100 percent of their health insurance premiums as business expenses. If you provide health insurance to your employees, you may be able to benefit from the small business health care tax credit (see below). Finally, if you use your car for business, you may be able to deduct 53.5 cents per business mile driven in 2017 (more about this below).

Setting Up and Contributing to a Retirement Plan

If you have your own business, consider setting up and contributing as much as possible to a retirement plan such as Keogh plan, Simplified Employee Pension (SEP) plan or SIMPLE IRA plan. These are allowed even for a sideline or moonlighting businesses. Several types of plans are available which minimize the paperwork involved in establishing and administering such a plan.

Hiring Your Child in the Business

If your child is under age 18, he or she is not subject to employment taxes such as FICA and federal unemployment taxes from your unincorporated business (income taxes still apply). In addition, your child may be able to contribute to an IRA using earned income. This will reduce your income for both income and employment tax purposes and shift assets to the child at the same time; however, you cannot hire your child if he or she is under the age of 8 years old.

A word about proper documentation…

Unfortunately, many taxpayers forgo worthwhile tax credits and deductions because they have neglected to keep proper receipts or records. Keeping adequate records is required by the IRS for employee business expenses, deductible travel and entertainment expenses, and charitable gifts and travel, and more.

But don’t do it just because the IRS says so. Neglecting to track these deductions can lead to overlooking them as well. You also need to maintain records regarding your income. If you receive a large tax-free amount, such as a gift or inheritance, make certain to document the item so that the IRS does not later claim that you had unreported income.

If you’re ready to save money on your taxes this year but aren’t sure which tax-saving strategies apply to your financial situation, don’t hesitate to call.

• By Leon Clinton
• October 8, 2017

October 10—————-

Employees who work for tips – If you received $20 or more in tips during September, report them to your employer. You can use Form 4070.

October 16—————-

Individuals – If you have an automatic 6-month extension to file your income tax return for 2016, file Form 1040, 1040A, or 1040EZ and pay any tax, interest, and penalties due.

Electing Large Partnerships – File a 2016 calendar year return (Form 1065-B). This due date applies only if you timely requested a 6-month extension of time to file the return.

Employers Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in September.

Employers Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in September.

October 31———-

Employers – Social Security, Medicare, and withheld income tax. File form 941 for the third quarter of 2017. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until November 10 to file the return.

Certain Small Employers – Deposit any undeposited tax if your tax liability is $2,500 or more for 2017 but less than $2,500 for the third quarter.

Employers – Federal Unemployment Tax. Deposit the tax owed through September if more than $500.

• By Leon Clinton
• October 2, 2017