Tax Planning for Small Business Owners


Tax planning is the process of controlling when, whether, and how to conduct business and personal transactions to reduce or eliminate tax liability. It is to your benefit to review your income and expenses monthly and meet with your CPA quarterly to analyze how you can take full advantage of the provisions, credits and deductions that are legally available to you.

CPA Tax Accountant in CovingtonWaiting until the due date of April 15 to prepare your tax return and put your financial house in order is a straight path to paying higher taxes. To manage your taxes and minimize your tax bill, you need to know the rules of the game, which are constantly changing. There’s a lot to think about, including expired provisions, expiring tax cuts, possible changes to tax credits, the debt ceiling and fiscal cliff, roll-out for the new health care tax provisions - the list goes on and on.”

Tax Planning Strategies

Various tax planning strategies are aimed at the owner's individual tax situation and some at the business itself. The strategy will be structured in a way that accomplishes one or more of these intersecting 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 will 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. Once you know what your approximate income will be, you can take the next step: estimating your tax bracket.

Developing estimates may be difficult and by its very nature will be inexact. However, you should already be projecting your sales revenues, income, and cash flow for business planning purposes. The more accurate your estimates are, the better the odds that your tax planning efforts will succeed.

Maximizing Business Entertainment Expenses

Entertainment expenses are legitimate deductions that can lower your tax bill and save you money. The IRS allows up to a 50% deduction on entertainment expenses, but you must keep accurate records and the business meal must be arranged with the purpose of conducting specific business.

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, but locations that include ongoing floor shows or other distracting events that inhibit business discussions would not.

Important Business Automobile Deductions

Accountant Covington LAIf you use your car to visit clients or go 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. If you own two cars, you can 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.

You can deduct car expenses by taking either the standard mileage rate or using actual expenses. The mileage reimbursement rates for 2014 are 56 cents a mile for business, 14 cents per charitable mile, and 23.5 cents for moving and medical miles. 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 us.

Increase Your Bottom Line When You Work At Home

The home office deduction is a write-off that many business owners are concerned with reporting. Yet, there are so many tax advantages. Here are a few common tips for home office deductions that can make tax season significantly less traumatic for those of you with a home office: display your home 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, and retain receipts and paid invoices. Keeping these documents makes it easier to determine percentages of deductions later on in the year.

Section 179 Expensing

Section 179 expensing allows you to immediately deduct, rather than depreciate over time, business property and equipment. Your business can expense $500,000 worth of qualified business property that you put into service by the end of the day December 31. The equipment purchased can be new or used and includes certain software, home office furniture and equipment, and qualified leasehold, retail, and restaurant improvements (see immediately below).

$2,000,000 is the maximum amount that can be spent on equipment before the Section 179 deduction begins to be reduced on a dollar for dollar basis. A bonus depreciation of 50 percent is taken after the $2,000,000 Section 179 cap is reached and is allowed on qualified assets (new equipment only--no used equipment and no software).

Beginning in 2016, Section 179 expensing will be indexed for inflation in future years.

Abbreviated 15-year Asset Life

Abbreviated 15-year life of qualified retail, restaurant, and retail improvements: the shortened 15 — rather than 39 — year recovery life of these three types of assets has been made permanent.

Research and Development Credit

Beginning in 2016, businesses with less than $50 million in gross receipts will be free to use the R&D credit to offset alternative minimum tax. In addition, certain start-up businesses who may not have an income tax liability will be able to offset payroll taxes with the credit

Deduction for Domestic Production Activities

The Section 199 deduction (also referred to as the domestic manufacturing deduction, U.S. production activities deduction, and domestic production deduction) is a tax break for businesses that perform domestic manufacturing and certain other production activities. It was established by the American Jobs Creation Act of 2004 in an effort to ease the tax burden of domestic manufacturers and as a result make the investment in domestic manufacturing facilities more advantageous.

Section 199 generally provides for an extra deduction of 9% of the income from certain production activities, in addition to the otherwise allowable deduction for production costs. The activities that qualify for this deduction are not limited to what might be thought of as traditional manufacturing but include construction, engineering, architectural services, film production, some utility company activities, and producing certain other qualifying production property.

Disclaimer: The information above is subject to change due to changes made by taxing authorities. This is not a complete listing of all federal and state tax credits and deductions. Please call Pinell & Martinez, CPAs to discuss the tax credits and deductions that may be available for you and your business.