As you’re getting out your organizers and planners for the new year for your business, you most certainly have tax preparation for 2017 penciled high on the list. But along with that note—and highlighted with a bright neon marker—should be asking your CPA firm at your tax preparation meeting about a tax reduction strategy for the years 2018 and beyond.
With a tax reduction strategy, your CPA in Austin, TX will recommend to you how to save on your business’ income tax and how to reduce that income tax come 2018 and the years thereafter.
You must keep in mind, though, that a tax preparer only deals with the symptoms of not having a tax reduction strategy. Your business is the one that must take the proper steps to turn those identified symptoms into reality, with a focus on your fiscal future always utmost in mind.
What sorts of steps will your accounting firm recommend as part of a tax strategy and reduction plan? Here are six that are most likely to be on the CPA’s list, but rest assured that there may be much more.
1) Using Depreciation to Plan Your Future Taxes
You’ll learn from your CPA that there are a number of depreciation options for small businesses and that equipment depreciation, particularly, can bring great flexibility into your taxable income.
The Internal Revenue Service defines depreciation thusly: “An income tax deduction that allows a taxpayer to recover the cost or other basis of certain property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property.”
You’ll find that most types of tangible property, such as buildings, machinery, vehicles, furniture, and equipment, are depreciable. Land, however, does not fall into this category. Also, certain other types of intangible property, such as patents, copyrights and computer software, are depreciable.
Your CPA might additionally recommend what’s called a “cost-segregation study,” which divides assets into their respective categories and assigns the appropriate deductions.
To determine—and accelerate—depreciation and get those deductions today instead of two decades from now, you can opt for what’s called a “cost-segregation study,” which divides assets into their respective categories and assigns the appropriate deductions.
As part of a tax strategy, your CPA may also tell you how to prepare a multi-year equipment acquisition budget and help you understand how mid-quarter depreciation works.
If more than 40 percent of your additions fall in the last quarter of the tax year, for example, your first-year depreciation is recalculated and probably reduced. This means that a budget that plans large additions in the last quarter of a tax year may need to be accelerated by a few months.
2) Take Advantage of Other Major Tax Deductions for Your Business
If you’re a business owner, you’ll want to make sure you’re making use of Section 179 of the U.S. tax code. This proviso allows companies to deduct up to $500,000 in assets for the fiscal year.
There’s also a measure known as “bonus depreciation,” which allows business owners to depreciate 50 percent of the purchase of new or used equipment. If you were wise and already have a tax strategy plan in place for 2017, this sort of deduction would apply through this year; then you could depreciate 40 percent of the equipment purchase cost in 2018 and 30 percent of the cost in 2019.
The bottom line from both of these options: You’re lowering your taxable income by seizing upon some big deductions.
3) If You’re Thinking About Selling Your Business in a Few Years, Plan Wisely
If you’re thinking about retiring or perhaps seeking some other career path in a few years and you may sell your business as a result, discuss with your tax strategy adviser a long-term exit strategy that will ensure that the proper groundwork is being laid today. Depending on the structure of your enterprise and the terms of your sales transaction, the tax results can differ hectically.
For example, if your business is a C corporation, you should zero in on minimizing the effect of double taxation should you sell.
Because Class C corporations are taxed based on their operating revenues, their shareholders also must pay tax on any distributions or dividends they receive from the corporation, a double tax that’s certain to raise many groans. A much bigger tax problem can arise if the C corporation decides to sell its appreciated assets: the tax gulp there, too, can be awfully hard to swallow.
4) Keep Current on Any Changes in the Tax Laws
The tax law is constantly changing—and such change may well come soon if President Donald L. Trump’s plan to cut business and other taxes becomes law.
Your CPA is well-versed in such changes and will apprise you of them when it comes to your next tax planning or tax preparation meeting. But that doesn’t stop you from staying ahead of the tax game yourself by keeping abreast of major legislation, court cases, and IRS rulings that can arise frequently throughout the year.
You may well find that breaking tax news can present you a new tax deduction, once you’ve learned about it from a reputable news source and you act in a timely manner. First, contact your CPA and confirm the new opportunity before taking any action.
Such instances as the Economic Stimulus Act of 2008 could occur, for example. That congressional legislation allowed businesses to deduct the full price of qualifying equipment purchased or financed during that tax year. Usually, under Section 179 of the IRS code, which we explained here earlier, businesses that buy qualifying equipment can write off those expenses in smaller increments spread out over a series of years.
If you had kept up on such news, you also probably knew that Congress extended that break under the American Recovery and Reinvestment Act of 2009.
Another example arose in 2005 when Hurricanes Katrina, Rita, and Wilma skirted across parts of the United States, and a number of tax-saving breaks were created for a short time. They included a hike in the charitable contribution limit for both corporations and individuals, but only through the end of 2005.
With Hurricanes Harvey, Irma, and Maria all striking the mainland and Puerto Rico in 2017, similar tax breaks could be forthcoming from the news ticker.
5) Making Sure Your Business Is Structured Properly
Are you a sole proprietorship, a limited liability company (LLC), or some other business structure? Your accountant may tell you when you’re devising a tax strategy plan that it might be time to change your business structure.
For example, an LLC can decide that it wants to be taxes as an S corporation. When it’s taxed as an S corporation, only the salary paid to the owner is subject to FICA Taxes. An owners distribution of profits is not subject to FICA taxes. Without an S Corporation election, the LLC owner pays all of the self-employment tax on all income, which is the equivalent of paying both the employer’s and employees’ share of the FICA tax on all of the business earnings up to the FICA tax income ceiling.
Accountants have found that most businesses that start out small, say as a sole proprietorship, don’t change their structure when they should. When you have a closely held company in which the income passes through to you as the owner, your CPA may recommend that you set yourself up as an LLC or an S corporation instead.
By structuring your company as a C corporation, the first $50,000 of your income under current law is taxed at a rate of 15 percent, as opposed to a 35 percent rate if you’re in the highest tax bracket. Those rates are subject to change, of course, if the Trump tax plan clears Congress.
If You Don’t Have a Tax Strategy Plan, Now’s the Time to Ask Your CPA
To assure your company continued financial success in the tax years 2018 and thereafter, press your accountant for information on tax reduction strategy if you’re currently devoid of such wise, long-term planning.
For tax strategy planning in Austin TX and the rest of the Hill Country, seek out the certified public accountants at locally owned and operated West Austin Tax, where you’ll discover a quick response time and find that these sorts of complex tax situations are welcomed.
West Austin Tax will tell you why you need a worthy, long-term plan and how a customized tax strategy is the chief cure for overpaying your future taxes.
*West Austin Tax is not a CPA firm.