It’s almost time to close the books on another tax year, but it’s also time to be open to the many opportunities designed to alleviate your tax burden. Here are a few to get the ball rolling. While these are by no means exhaustive, they should be enough to get you started when it comes to tax-saving tactics that could work for you and your business. With a complex and ever-changing tax code, it’s a good idea to schedule a meeting with your financial advisor and tax professional.
Obviously, any income you receive by December 31 counts as income for the current year, but there are ways to put off income to the next tax year and also reduce your adjusted gross income this year. There are several strategies to increase deductions now if you expect your income to be at the same or a lower rate next year.
For example, you can send your invoices out a few days later in December to delay receiving payment until January. Conversely, you can prepay some bills that are due in January to take the deduction for this tax year. A little foresight here can add up to big tax savings.
Section 179 of the IRS tax code was created to encourage businesses to invest in them. It allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year from your gross income. This deduction of up to $500,000 is good on new and used equipment, as well as off-the-shelf software. To take the deduction for tax year 2017, the equipment must be financed or purchased and put into service before the end of the calendar year.
It’s important to note, though, that $2 million is the spending cap on equipment purchases. Anything beyond that means the Section 179 deduction will be reduced on a dollar-for-dollar basis. This truly makes Section 179 a small business tax incentive because larger businesses that spend more than $2.5 million on equipment won’t get the deduction at all.
BONUS: Take advantage of the 50% bonus depreciation for 2017, which is generally taken after the Section 179 spending cap is reached. It is available for new equipment only (used equipment qualifies for the Section 179 deduction, but not this one).
If your business has changed significantly since you first started a company retirement plan, it’s a good idea to make sure this important employee incentive is still the right fit. There are several options to choose from, including SIMPLE IRAs, profit-sharing and safe harbor 401(k)s. A qualified plan offers a deduction for your contributions, and you defer tax on earnings on contributions. Talk to your advisor.
A multiple-owner LLC is taxed as a partnership by default, while a single-owner LLC is taxed as a sole proprietorship. However, LLCs can choose to be taxed as a C- or S-corporation by filing IRS Form 2553. Owners with an LLC can still elect to be taxed as an S-corporation retroactively at year’s end. There are some conditions that apply, so talk to your tax professional.
If your business losses exceed your income for the year, the excess can lower your income and cut your tax bill in another year. You can apply the loss to prior years’ taxes to get a refund or apply the loss in the future. The rules and formulas for this maneuver are complex, so make sure to consult your tax professional.
If you use your vehicle to visit clients or attend business meetings away from your office, you may deduct expenses by taking either the standard mileage reimbursement rate for 2017: 53.5 cents per mile; or you can calculate your actual expenses. For example, if you drive your car 20,000 miles per year and 10,000 of those miles are for business, you can claim 50% of expenses such as gas, tires, repairs, insurance, license and registration fees, and depreciation.
You cannot use the actual expense method if you are leasing a vehicle and previously used the standard mileage rate. So, if your total car expenses are $12,000 for the year, you can claim $6,000. If you own two vehicles, another way to increase deductions is to include both cars in your deductions. Make sure you keep an accurate mileage log and receipts.
Entertainment expenses are legitimate deductions if you follow the guidelines: business must be discussed before, during or after the meal; and the surroundings must be conducive to a business discussion such as a quiet restaurant (not venues or events such as theaters, ski trips, golf courses, sporting events or hunting trips). The IRS allows up to a 50% deduction, but be sure to keep proper notes and receipts.
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