Tax planning is the process of looking at various tax options in order to determine when, whether, and how to conduct business and personal transactions to reduce or eliminate tax liability.
Many small business owners don’t think about tax planning, but tax planning is an important process that can directly impact your tax liability. No one likes surprises that could have been prevented!
Where to start…
As a baseline, we recommend reviewing your income and expenses monthly and meeting with your CPA quarterly to analyze how you can take full advantage of the provisions, credits, and deductions that are available to you.
Ideally, you should follow a roadmap like this one to make sure you have a strategic partner to help you manage and plan – looking forward– for your best financial results.
Tax planning strategies…
Countless tax planning strategies are available to small business owners. Some are aimed at the owner’s individual tax situation and some at the business itself, but regardless of how simple or how complex a tax strategy is, it will be based on accomplishing one or more of these often-overlapping goals:
- Reducing the amount of taxable income
- Lowering your tax rate
- Controlling the time when the tax must be paid
- Claiming any available tax credits and deductions
- Controlling the effects of the Alternative Minimum Tax
- Avoiding the most common tax planning mistakes
In order to plan effectively, you should estimate your personal and business income for the next few years. Once you know what your approximate income will be, you can take the next step: estimating your tax bracket.
Eliminate stress and time by making your CPA your strategic business partner.
The effort to come up with crystal-ball estimates may be difficult and certainly not exact. On the other hand, you should already be projecting your sales revenues, income, and cash flow for general business planning purposes.
Have we lost you yet? It can be overwhelming for sure.
This is where a good CPA will shine. Remember that roadmap I mentioned earlier? If you have a good strategic partner to help you plan and organize your business financials, you’ll be able to channel your energy and talent into your business versus worrying about tax planning, cash flow stabilization, and financial statements.
Here are a few areas to pay close attention to every year that can directly impact your tax liability.
- Maximizing Business Expenses
Business meal expenses are legitimate deductions that can lower your tax bill and save you money, provided you follow certain guidelines. To qualify as a deduction, business must be discussed before, during, or after the meal and the surroundings must be conducive to a business discussion.
Under the Tax Cuts and Jobs Act of 2017, the deduction remains at 50 percent for taxpayers who incur food and beverage expenses associated with operating a trade or business. Employee meals while on business travel also remain deductible at 50 percent. For tax years 2018 through 2025, the 50 percent deduction expands to include expenses incurred for meals furnished to employees for the convenience of the employer as well. Amounts after 2025 are not deductible, however.
Under the TCJA, the deduction for business entertainment expenses is eliminated. Meals still qualify at 50 percent, but costs must be listed separately.
- Important Business Automobile Deductions
If you use your car for business you may be able to take certain deductions for the cost of operating and maintaining your vehicle. You can deduct car expenses by taking either the standard mileage rate or using actual expenses. The mileage reimbursement rate for 2020 is 57.5 cents per business mile (down from 58 cents per business mile in 2019).
If you own two cars, another way to increase deductions is to include both cars in your deductions. This works because business miles driven is determined by business use. To figure business use, divide the business miles driven by the total miles driven. This strategy can result in significant deductions. Whichever method you decide to use to take the deduction, always be sure to keep accurate records such as a mileage log and receipts.
- Home Office Deductions
The home office deduction is quite possibly one of the most difficult deductions. Yet, there are so many tax advantages that it is worth the trouble.
Here are a few common tips for home office deductions.
- Display your home phone number and address on business cards, have business guests sign a guest log book when they visit your office, deduct long-distance phone charges, keep a time and work activity log, retain receipts and paid invoices. Keeping these receipts makes it so much easier to determine percentages of deductions later on in the year.
- Section 179 expensing for tax year 2020 allows you to immediately deduct, rather than depreciate over time, $1.04 million of the first $2.59 million of qualifying equipment placed in service during the current tax year. Equipment can be new or used and includes certain software. All home office depreciable equipment meets the qualification. Indexed to inflation for tax years after 2018, the deduction was enhanced under the Tax Cuts and Jobs Act of 2017 to include improvements to nonresidential qualified real property such as roofs, fire protection, and alarm systems and security systems, and heating, ventilation, and air-conditioning systems.
- The “Bonus Depreciation” for qualified assets (new equipment only–no used equipment and no software) placed in service for tax years 2015, 2016, and through September 26, 2017, is 50 percent. Businesses with eligible property placed in service after September 27, 2017, and before January 1, 2023, are allowed to immediately deduct 100 percent of the cost. The bonus depreciation will be phased downward over a four-year period: 80 percent in 2023, 60 percent in 2024, 40 percent in 2025, and 20 percent in 2026.
Ideally, careful tax planning should be done all year long with a heavy focus fourth quarter on planning for the next year. However, planning is also important during tax season. If you haven’t already set up an appointment with your CPA to discuss a strategic and proactive plan for your business, that is your first step.
At Thousand CPA, we realize that most business owners don’t have the expertise to minimize their tax liability, stabilize their cash flow, and maximize their financial position. We educate you, stay in front of you, and we make it happen.