One minute you’re making a sale. The next, you’re making a personnel decision. Later in the day, you’re on to payroll. If you’re an entrepreneur or have a growing small business, your to-do list never ends. And to top it off, you’ve got to keep your business in the black.
Running a profitable business can be a tall order. But even when you make the effort, taxes can strip you of your reward. Here are five ways you—with the guidance of your tax advisor—can keep your tax bill from taking a bite out of your bottom line.
#1. Time Income and Deductions to Your Advantage.
You can do this by first projecting your business income for this year and next. With this insight, you can outline strategies for deferring tax—which is often the ideal approach. You can do this by deferring income to the next year, or making a large deductible purchase sooner rather than later. Nevertheless, it’s important to weigh the potential tax benefits of these strategies against potential impacts on your cash flow and other operational processes. Your tax advisor can help you determine the most advantageous course of action.
#2. Leverage Depreciation-related Breaks and Strategies.
Generally speaking, if you purchase an asset with a useful life of more than one year (such as a vehicle), you’re required to depreciate its cost over a period of years. However, breaks and strategies exist that can help you maximize depreciation deductions during the year of purchase.
The Section 179 expensing election, for example, allows you to deduct (rather than depreciate) the cost of purchasing eligible new or used assets, such as equipment and furniture and, new for 2016, air conditioning and heating units. Also, Section 179 expensing for qualified leasehold-improvement, restaurant and retail-improvement property has now been made permanent. Just remember, the election cannot be used to reduce your net income below zero.
In addition to breaks afforded by Section 179, there’s a 50 percent bonus depreciation that allows for additional first-year depreciation for qualified assets, as well as regulations that make it possible to immediately deduct the costs of repairs to tangible property. These are just a few of the available options. Each can be fairly complex, so be sure to consult with your tax advisor.
#3. Make the Most of Vehicle-related Deductions.
There are two ways to deduct business-related vehicle expenses: 1) the mileage-rate method, and 2) the actual-cost method. If you use the actual-cost method and purchase a new or used vehicle, it may be eligible for the aforementioned Section 179 expensing—although many rules and limits apply.
#4. Don’t Forget About Section 199 Deduction.
Traditional manufacturers—as well as businesses engaged in activities such as construction, engineering, architecture, computer software production and agricultural processing—may be eligible for the Section 199 deduction. Also called the “manufacturers’ deduction” or “domestic production activities deduction,” it amounts to 9 percent of whichever is lower: income generated by qualified production activities, or taxable income. Like other deductions, it includes several limits and rules. Your tax advisor can help you determine if Section 199 applies to your business.
#5. Take Note of Tax Credits.
Tax credits are particularly beneficial because they reduce tax liability dollar-for-dollar. And some, like the research credit (also known as the “R&D credit”), have recently been made permanent by Congress. Available tax credits include the Work Opportunity credit and the New Markets credit. You may also be able to use the Retirement Plan and Small-Business Health Care credits. Check with your tax advisor to determine which credits could make a difference for you.
Is Your Small Business Primed for Expansion or Growth? We Can Help.
If you have a growing company, tax advisors and accounting specialists can be your greatest resource. Your time is best spent on running your business; our focus is on uncovering tax-savings opportunities to help improve your bottom line. If you have questions or would like to chat about your business goals, please contact Jerry Riegel.