Three Year-end Tax Planning Tips for Business Owners
As the end of the year approaches, there are. a few strategies that business owners may be able to employ to help minimize their tax liabilities. This article examines three approaches that are simple to implement and could make a significant impact.
1. Defer Income
Deferring income into the next year or accelerating expenses into the current year can lower this year’s tax liability. The method by which a business defers income depends on whether it uses the cash or accrual basis of accounting. A cash method taxpayer can delay submitting invoices to its clients/customers, while an accrual basis business can hold off shipping their products or providing services. Expenses can be accelerated by making additional purchases before the end of the year -but, remember that any new equipment would need to be placed in service before year end.
When employing this strategy, it’s important to consider the projected tax rates of both the current and following year. In addition, the company’s current cash flow needs should be taken into account.
2. Consider the Research Credit
In the past, many business owners hesitated to use the research credit. This was partly because this credit was considered temporary, though renewable multiple times. In addition, the research credit often provided limited, or no benefit, as it was applied only against the regular income tax and did not reduce the alternative minimum tax (“AMT”).
The Protecting Americans from Tax Hikes (“PATH”) Act of 2015 made the research credit permanent, adding several provisions that make it more attractive. For tax years beginning after December 31, 2015, eligible small businesses can now use it to offset the AMT. These are businesses with less than $50 million in average gross receipts for the three preceding years.
The credit generally can equal 20% of the amount by which a company’s qualified research expenses exceed its base amount. This is determined, in part, by the amount the company spent on research in the past. The law also allows an alternative simplified credit.
In addition, “qualified small businesses” will now be able to use the research credit to offset the employer portion of the FICA payroll tax. “Qualified small business” is defined as a business with less than $5 million in annual gross receipts and having gross receipts for no more than five years. The amount of credit that can be used to offset payroll tax is capped at $250,000 for each eligible year. This is also effective for tax years beginning after December 31, 2015.
3. Establish a Retirement Plan
By establishing a retirement plan, a business may be able to reduce its tax liability, and, at the same time, create a valuable incentive for employees to join or remain at the company. Many companies can deduct some, or all, of their contributions on behalf of their employees. The percentage the employer contributes depends upon the type of retirement plan.
In addition, some small businesses can claim a credit for some of the ordinary and necessary costs of starting a SEP, SIMPLE IRA or qualified plan . To qualify, the business must have had 100 or fewer employees who received at least $5,000 in compensation the preceding year, and at least one participant must be a non-highly compensated employee. The credit equals 50% of the cost to set up and administer the plan and the cost to educate employees about it, and is limited to $500 per year for each of the first three years of the plan.
These are just a few of the tax planning approaches you may want to consider which may lower your tax burden this year. Understanding the complexities of the tax rules can help you stay ahead of the competition. Your CPA can help determine whether these strategies apply to your company’s circumstances, as well as offer other helpful ideas to minimize your taxes.
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