Top 5 End-of-Year Tax Strategies for Small Businesses
Navigating the tax season is rough for every company, but small businesses are exceptionally vulnerable when it comes to dissecting tax issues and making optimal decisions for financial health. The time to think about tax season isn’t at the first of the year -- it’s all year long, and these five strategies can help any small business plan for a simpler tax season with fewer headaches.
1. Make balancing your taxes a priority.
Traditional tax planning involves trying to accelerate deductions and credits, while deferring income. Many taxpayers are cash-basis taxpayers, which means that they get to deduct expenses when the expense is paid, and they have to declare income when payment is received. Therefore, expediting expense payments while deferring income payments can improve the current year's tax position.
Keep in mind that the inverse is also true. If your business anticipates more significant revenue in 2016, it’s wise to collect income this year and delay deductible expenses until 2016 in order to head off a bad situation for 2016.
2. Invest in retirement now.
If you own a small business, you can create retirement plans that take advantage of tax deferral rules to maximize tax savings now and retirement savings later. Instead of trying to tackle the ins and outs of setting up a retirement plan yourself, consult a professional. There are so many different options -- 401(K), SEP IRA and SIMPLE plans -- that it’s worth having a seasoned expert to help you navigate the system and choose an ideal option that will serve both your business and personal financial health now and in the future.
3. Understand taxable versus untaxable fringe benefits.
Fringe benefits such as a company car, subsidized meals and insurance can be a great way to pay for services and decorate a more enticing employee package. However, these fringe benefits are taxable most of the time -- unless they are specifically excludable by law. Knowing which fringe benefits linger outside the taxable realm can ease the tax burden every year. When your business understands which benefits pack this double punch, you can save money on payroll taxes. The tax rules for each are a little different, so it’s important to choose the right fringe benefit investment for your individual company.
4. Find the silver lining in a loss.
Most small businesses end up with net operating losses (NOL) during the first few years of operation. A net operating loss means tax deductions are greater than the taxable income, which usually happens when business expenses have exceeded earnings. Though this seems like bad news, NOLs can be used to recover past tax payments and reduce future tax payments. NOLs can create tax relief by applying loss to past payments and receiving a credit or by applying the net loss to future income taxes. The rules vary based on your business, so knowing how to work them can have a huge impact.
5. Invest in counsel to benefit your business.
Tax planning shouldn’t be an end-of-year scramble. Instead, it should involve a consistent, yearlong conversation with your tax attorney or accountant. It’s better for your business’s continual health -- and your sanity -- to work with a professional who can provide meaningful counsel on a variety of choices you make throughout the year that can drastically change your tax situation. When you establish a relationship with a tax advocate, you’re less likely to face audits and more likely to save significantly as your business grows.
Garrett Gregory is an attorney and co-founder of Gregory Law Group, PLLC. He worked for more than a dozen years as a senior attorney for the IRS’ Office of Chief Counsel, where he focused on the international taxation of financial institutions and products and domestic audits.
Deborah Gregory is an attorney and co-founder of Gregory Law Group, PLLC. She worked as a senior attorney for the IRS’ Office of Chief Counsel for more than 12 years.