Just as in every prior year in the recent past, tax planning for the current year is subject to dramatic changes based on any last minute changes to the tax code. That being said, now is the time to get your planning done in order to best minimize tax exposure.
There are several areas to consider while planning for the upcoming year end. This blog will focus on the small business aspects.
Understand what your 2015 is expected to be. First and foremost you need to understand how profitable a year your company is going to have. If you are having a tremendous year, you will want to find ways to accelerate deductions. However if 2015 is a down year, it may be time to postpone deductions until next year, or liquidate some appreciated assets. The first most critical part of planning is to know what the right strategy is.
Timing of new equipment purchase – As the law currently stands, the section 179 max for 2015 is $25,000. If you have not purchased any equipment throughout the year, it may be advantageous to make the purchase in 2015. If you have already exhausted the deduction, holding off until January may provide a much bigger benefit over the long term. This is the one area that is notorious for last minute legislation changes, so make sure to keep abreast of the last minute changes.
Make sure your compensation is properly reported - This is an area where young businesses tend to slip up a lot. If your business is taxed as an S-Corporation, officers must receive a reasonable salary that is reported on a W-2. Also any shareholder greater than 2% must have their Health insurance expense reported on their W-2 in order for it to get SE Health Insurance treatment. Also Partners in a partnership should NOT be receiving a W-2. The payments for services provided by a partner should be classified as guaranteed payments.
Get your reimbursable expenses together – Make sure that your mileage logs show total miles driven, commuting miles, and business related travel. Depending on the entity, the mileage reimbursement check will need to be cut from the business to the individual. Also any personally paid business expenses need to be compiled and reported. Once again the treatment of these expenses varies.
Bundle Expenses – Depending on your situation, all of the expenses that are due around the end of the year to beginning of the next year can be either paid early to include them in 2015, or paid after Dec 31 and have them expensed in 2016. This is of course assuming that you are on the cash basis in regards to tax reporting. Key point, it is the date you send the check, not the day the vendor cashes the check which determines which period the expense falls.
Avoid double taxation – For businesses that are C-corporations, there is generally no reason to be double taxed on income. If the profit is going to be used in the company at a later date for expansion, operations etc., fine, pay the tax at the corporate level and keep the assets in the company. However, if there are no immediate plans for utilizing the profits, pay a bonus to yourself to zero out the income. Yes there will be additional payroll taxes due, but the payroll tax rates are much lower than the corresponding income tax rates.
Keep it in the family – If your spouse and or children do not have other employment, they may need to work for the business. There are multiple possible benefits to this including qualifying for future social security benefits, eligibility for retirement plans, possibly removing income from parents’ higher bracket.
Fund your retirement – Perhaps the largest tax savings vehicle is your retirement plan. If you are not fully funding your retirement plan you are giving money away. This is something that needs to be an extremely high priority.
Fund education savings - If you have children, consider creating and funding 529 plans for their college savings. www.path2college529.com is a great site offered by the State of Georgia to learn about these plans.
HSA Accounts – Contributions to your HSA are not only deductible, but the money is spent tax-free if used for qualifying medical expenses. Also money left in the account grows tax free while in the account.
Cash management planning - The year end tax planning time can also create a serious cash flow crunch when weighing important tax planning decisions and investments. A cost-benefit approach should be carefully considered. Lines of credit, and other forms of debt can be helpful, but pay close attention to their true cost.