As with individuals, tax reforms could potentially affect your small business, but the prospects are still uncertain. In the meantime, here are some end-of-year business tax planning strategies to minimize your 2017 net income:
1. Max out on Section 179. Under Section 179 of the tax code, a business can currently deduct, or “expense,” the cost of qualified new or used property placed in service during the year up to $510,000 for 2017. The deduction is limited to your taxable business income. Bottom line . . . buy office equipment and other business equipment before year end.
2. Amounts paid to improve tangible personal property must be capitalized and depreciated over time, but recent regulations provide a unique opportunity. Under a safe harbor election a small business may currently deduct certain building costs above and beyond the maximum Section 179 allowance. This election is limited to $500 for a specific item.
3. Self-employed contractors and small businesses have a lot more flexibility over when they receive their income than do people who get a regular paycheck from their employer. If you can afford to wait, defer invoicing your customers and clients for December activity until after January 1st. This reduces the amount of income that you report for this year, and the amount that you will be taxed. (Of course, it does simply push the tax burden until next year, but that is what deferment means—putting something off until later.)
4. Salary – take it. If your business is structured as an S-corporation, the IRS rules require you to pay yourself a “reasonable” salary. You will have to pay taxes as ordinary earned-income. However, you can withdraw additional money from the profits of your business as “dividends” and pay the much-lower tax rate that is allowed for investments.
Deductible business expenses – maximize them. If you have the ability to pre-pay expenses that can be deducted from your business income, then do so! Buy that computer equipment, lease a vehicle, prepay your advertising expenses for the first quarter of next year, give your employees their year-end bonus before December 31st. Anything that you intend to buy in the first quarter of 2018, you can pull forward to now and deduct it from this year’s profits instead of next year’s.
5. Retirement accounts – max them out. Regularly-employed people can contribute to a 401(k) plan through their employer and/or participate in an IRA (traditional tax-deductible or Roth), but small business owners can have SEPs (Simplified Employee Pension) and solo 401(k)s and SIMPLE IRAs. These offer the opportunity to shelter far more of your income from taxes than their “normal” counterparts. These plans can be confusing and have different requirements, advantages, and disadvantages especially if you have employees. Seek advice before charging in.
If you give holiday bonuses, be certain to run these through your payroll system. This can create a nondeductible expense if not handled properly. If you like to give a nice round number you can gross it up! But, don’t make the common mistake of not running it through as a W-2 payment.
Other Hints and Tips:
1. Prepay Expenses using the IRS safe harbor. This regulation allows you to prepay and deduct qualifying expenses up to 12 months in advance without challenge by the IRS. Ask us for more details.
2. Stop billing customers until after December 31.
3. Use your credit cards. The day you charge a purchase to your business credit card is the day the tax is deductible. Tip: If you operate as a corporation the business must reimburse you by the end of the year if you want the corporation to realize the deduction.
4. Review your books and records for the year. Ensure you are up to date with your reconciliations.
5. Start preparing for the end of year tasks. This includes:
a. Verifying 1099 information
b. Identify fringe benefits that should be appear on W-2s
c. Take inventory
d. Make 4th quarter estimated tax payments
e. Review your business structure
f. Review your mileage log
In addition to the tax moves listed above, you can change to an accounting solution to make next year’s tax-time much easier. If you’re heading into tax season with a mishmash of electronic records, spreadsheets and papers, now might be the time to consider switching to a comprehensive small business tax and accounting solution. Spending less time on invoicing and financial reporting frees up your time so you can focus on tasks that are revenue-generating, and helps you keep stress at a minimum. Let us help you.
Please know that, although at MJW EA & Company we attempt to help our clients in all ways possible, we are not lawyers or insurance and disability experts. We are tax specialists. These issues many times impact your taxes; but are outside our purview. We can – and are happy to – help with referrals when requested.