THE END OF THE YEAR is an ideal time for small business owners to take actions that could minimize their companies' tax bill next April, says accountant Vinay Navani, of Wilkin & Guttenplan P.C. By now you should have a pretty good idea of the type of year your company is having, allowing you to strategize how you might maximize profits and lower your tax liability. Navani recommends that you consider discussing these tips with your tax advisor:
Prepare for your tax bill well in advance
Having adequate cash flow is vital to a small business, so figuring out your tax liability in advance can help you to prevent cash flow disruptions by giving you the chance to put money aside or take out a line of credit to pay the tax bill. Also talk to your accountant about whether it makes sense to pay quarterly estimated taxes next year, which would allow you to distribute the tax burden throughout the year instead of having to find the cash for a large tax bill in April. (You may also need to pay estimated taxes throughout the year to avoid having to pay the IRS interest and possibly penalties.)
Set up a retirement savings plan
Small business owners have several options for retirement savings plans—SIMPLE IRA, SEP, 401(k), profit-sharing plan or IRA. They differ in the amount the employer can contribute, in their investment choices, and the ease and expense of setting them up, among other factors. Whatever the plan, however, contributions you make for yourself and your employees may be tax deductible. Small businesses may also get a tax credit to help defray the cost of starting a retirement plan. You have until the due date of your tax return in 2016 to contribute funds to a retirement plan for 2015. But some types of plans must be established before the end of this year to get the tax deduction for 2015.
"You could potentially be entitled to up to a $25,000 tax deduction for the purchase of new or used equipment, office furniture and off-the-shelf software."
Buy new equipment for your business
In 2015, you could potentially be entitled to up to a $25,000 tax deduction for the purchase of new or used equipment, office furniture and off-the-shelf software. The tax break is meant to benefit small businesses, so if your business is big enough to spend more than $200,000 on equipment, the deduction decreases. To qualify for the deduction, you must finance or purchase the equipment and put it into service before the last day of the year. The remaining cost of capital equipment purchases can be depreciated over time based on the applicable federal and state tax laws.
Defer revenues and accelerate expenses—or vice versa
If your company operates on a cash basis and your profits are looking to be higher this year than in previous years, you may want to take steps to defer revenue during the last part of the year, which could reduce your 2015 taxable income. Consider billing late in December or delaying the delivery of certain products or services until January. Another option: Prepay some 2016 costs in advance—for example, if you're going to a trade show in early 2016. Alternatively, if you expect your business to be more profitable in 2016 than this year, you might consider accelerating cash collection this year and delaying deductible expenses until the beginning of the new year.
Make a charitable contribution
Your business can donate cash, sponsor a charitable event, donate inventory or services, or give away used equipment that's sitting idle. Giving to charity can fulfill your goal for corporate social responsibility and engage your employees in a meaningful activity, and it could provide your business with a tax deduction equal to the fair market value of whatever property you donate.
3 Questions to Ask Your Advisor
- What is the maximum contribution I can make each year to an individual 401(k) account?
- Can I set up a retirement plan that covers my employees as well as myself?
- If I know now what my taxable income for the year will be, are there any tax-efficient investing strategies that might help me minimize my 2015 tax liability?
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Neither Bank of America nor any of its affiliates provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.