Tax Planning Strategies for Small Businesses

For small business owners, it’s never too late to consider tax planning strategies to improve your tax liability for the coming year. Here’s how to get started.

 

How Can Small Businesses Help Mitigate Their Taxes?

Tax planning may not be the most interesting part of running a business, but implementing the right business tax planning strategies can help drive business success. Managing your business tax liability properly can help you save money, ensure legal compliance, and set up your business for long-term growth.

Consider these seven tips for mitigating your business tax liability and maximizing the strength of your business through smart tax planning.

1. Evaluate Tax Credits

The IRS provides a number of tax credits available for small business owners. Tax credits allow you to subtract the amount of the credit from the amount of income tax you owe, reducing the taxes you pay dollar-for-dollar. Some of the tax credits for which business owners often qualify include:

Small Business Health Care Tax Credit. If you pay health insurance premiums for yourself or for employees, you may qualify for a tax credit equal to a significant portion of your premium costs.

Work Opportunity Tax Credit. If you hire and employ individuals from certain groups, you may qualify for a tax credit.

Disabled Access Credit. If your business incurs expenses for the purpose of providing access to people with disabilities, such as building a ramp to the door of your business, you may qualify for a tax credit of up to $5,000.

Charitable Contribution Credit. If your business makes a donation to a nonprofit organization or sponsors a charitable event, you may qualify for a tax credit equal to at least 50% of your charitable gift.

2. Review Your Tax Status

If your closely held business operates as a C corporation (C-corp), it’s a good idea to think about whether you really need to use that structure rather than an S corporation (S-corp). You may be able to reduce your tax liability if an S-corp structure will work for your business.

The main advantage of a C-corp is that it allows different stock classes, which enables the business to raise capital. But if your company doesn’t need to raise capital, a C-corp may just be increasing your tax liability without providing tangible benefits.

As a C-corp, your company pays its own income tax while you separately pay personal income tax based on your compensation. But S-corps don't pay corporate income tax, instead passing on business revenue as personal income to the company's owner or owners.

A C-corp with $1 million in EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) would pay 21%, the current corporate income tax rate, before distributing dividends, salaries or bonuses. An S-corp, on the other hand, would not incur that cost.

If you chose a C-corp structure to protect your personal assets when you incorporated the business, you might be able to achieve the same protection using an S-corp.

3. Consider Retirement Options

It’s also wise to analyze your company's qualified retirement plan — whether it's a 401(k), Simplified Employee Pension (SEP-IRA), profit-sharing or another employer-sponsored program — to make sure you're maximizing your tax-deferred contributions and using the best option for you and your business.

By contributing the maximum amount to a tax-advantaged retirement plan, you can help lower your tax liability.

4. Defer or Accelerate Income

If you’re trying to reduce your tax bill for the current year, one strategy is to defer income to the following year. If your business operates on a cash basis, you may be able to do this by waiting until the end of the year to invoice for products or services, so that you will receive payment in the following year. If you plan to sell real estate or other investments that would result in a capital gain, consider delaying the sale to take the capital gain in a later year.

In addition to deferring income, you can also work to accelerate deductions in the current year to further reduce your taxable income. For example, if you need to purchase equipment or make another significant investment in your business in the next year, accelerate the process and take this step by year end so you can take the deduction in the current year.

5. Maximize Your Tax Deductions

As a business owner, you might qualify for a number of tax deductions. It’s a good idea to use a trusted accountant to help you identify and maximize them.

Some of the most common for which you might qualify include the home office deduction, charitable gift deduction, mileage deduction for business use of your vehicle, and deductions for business expenses such as internet, phone and office supplies.

6. Relocate the Business

It’s easier said than done, but some business owners choose to relocate their businesses to lower-tax states to take advantage of the tax rates. A tax-friendly state may have lower corporate income taxes as well as lower property taxes and sales taxes, which can reduce your company’s overall tax burden and maybe even drive greater profits.

7. Consider Gifts

If you want to divest assets such as real estate but you don’t want to incur capital gains taxes, consider an irrevocable charitable remainder unitrust (CRUT). With a CRUT, you can sell the property, invest the proceeds, receive a percentage back annually over time, defer capital gains taxes by paying them pro rata, and eventually leave a generous donation to charity.

You can also make gifts to family members in order to reduce your taxable income. For example, business owners could gift significant stakes in the company to each of their children, spreading the income over family members and taking advantage of lower tax brackets.

Speak with your tax advisor to determine the right strategies for reducing your taxable income, and don’t delay. Some of the most effective strategies may take some time to work out.

City National Bank encourages you to consult with your banker, financial advisor and tax professional before making major changes to your financial situation. Need to discuss your wealth plan with an advisor and wish to find one? Get in touch with a City National wealth advisor today.