If you’re a small business owner, time is running out to take advantage of some income tax reduction strategies before the end of the year. As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year. Factors that compound the planning challenge this year include overall economic uncertainty and Congress's customary failure to act on important tax breaks that will expire at the end of 2016.
Although there’s been a lot of buzz around the newly elected president and almost daily discussion regarding potential tax law changes, for 2016, it appears as though there won’t be any major last-minute changes to the current laws. Small-business owners should revisit their current situation and the prospect of a potentially changed tax code next year. Though the end of the year is a good time for even non-business owners to do some tax planning, it's especially critical for the owners of small businesses. At the end of the year business owners should clean up their books and reconcile their cash balances, so they can begin to determine an intelligent tax plan for the year.
Know What You Owe
Many business owners who are sole proprietors, or have an interest in an S corporation, partnership, or limited liability company are required to make federal and state estimated income tax payments at quarterly intervals throughout the year. However, often times small business owners overlook these payments, especially if their cash flow is hard to predict. Since quarterly taxes for the fourth quarter of 2016 are due on January 15, 2017, take the time to make sure you've properly accounted for any discrepancies in your prior estimated income tax payments versus what was actually due. Traditional C corporations reporting on a calendar year basis owe their fourth quarter estimate on December 15. In addition, for those small business owners who collect a wage or salary from their business, you also have the alternative of adjusting your final income tax withholding from your paycheck(s) to help make up for any shortfall in your estimated income tax payments.
Fixed Asset Purchases
Should you have the available cash flow and need to buy some new equipment or furnishings, consider making a purchase before year-end. Section 179 depreciation allows you to expense certain fixed assets purchases, depending on taxable income and cost thresholds. Expensing is generally available for most depreciable personal property. The thresholds that apply this year signify that many small and medium sized businesses that make timely purchases will be able to currently deduct most, if not all of their purchases of machinery and equipment. In addition, the Section 179 depreciation deduction is not prorated for the time that the asset is in service during the year.
Set Up a Retirement Plan
Once you've determined your projected 2016 income tax liabilities and your cash availability at year end, you can start determining tax saving strategies to implement at year-end. One potential strategy can be to set-up a retirement account and to begin making contributions. Contributions you make as an employer to a qualified retirement plan are all tax deductible. However, it should be noted that there are strict rules regarding each plan as well as deadlines for when the retirement plan contributions must be made by, and when the plan must be set up. Be sure to seek professional advice to determine which of these plans is best for your business and financial circumstances.
Accelerate or Defer
Depending on the structure of your business, you may be able to defer receipt of income this year, which could reduce your current year income tax liability. Many sole proprietors use the cash basis of accounting, in which you only report revenue when cash has actually been received. On the other hand, if you had an unusually profitable year in 2016, you can try to accelerate deductible expenses. All of your revenue deferral or expense accelerating decisions should be first determined by current and projected cash flows. Another determination should depend on what tax bracket you expect to be in for 2016 versus 2017, based on current year tax laws and assumptions regarding future income tax law changes.
Are you pulling your hair out with small business tax issues? Call us, we can help. Contact me us at info@zinnerco.com or any of the professionals on staff at 216.831.0733 to learn more. We're ready to start the conversation.