THE END OF THE YEAR is an ideal time for small business owners to take actions that could help them 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 the following tips with your tax advisor:
1. Prepare well in advance
Having adequate cash flow is vital to a small business, so having an idea of what you may owe can give you the chance to put money aside or to take out a line of credit to pay the tax liability. 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 payment in April. (You may also need to pay estimated taxes throughout the year to avoid having to pay the IRS interest and possibly penalties.)
You could potentially be entitled to up to a $510,000 federal tax deduction for the purchase of new or used equipment, office furniture and off-the-shelf software.
2. Set up a retirement savings plan
In addition to personal IRA contributions, small business owners have several options for employer-sponsored retirement savings plans, including a SIMPLE IRA, SEP IRA, 401(k), or profit-sharing plan. They differ in the amount the employer and employee can contribute, in their available investment options, and in 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 certain retirement plans. For calendar year taxpayers, you generally have until the due date of your tax return (in 2018, that’s April 17) to contribute funds to a retirement plan for the 2017 tax year. But some types of plans must be established before the end of this year, or earlier during this year, to get the tax deduction for 2017.
For tips to help you minimize your personal tax liability, read "8 Year-End Tax Tips That Could Save You Money."Read More
3. Buy new equipment for your business
In 2017, you could potentially be entitled to up to a $510,000 federal 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 spends more than $2,030,000 on eligible equipment, the deduction begins to phase out and is completely eliminated above $2,540,000. 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 tax laws.
In addition, bonus depreciation was extended. Taxpayers can deduct 50% of the cost of new property placed in service during 2017, with a phase down to 40% in 2018 and 30% in 2019. The bonus depreciation deduction is not subject to a phase out.
4. Defer revenues and accelerate expenses—or vice versa
If your company operates on a cash basis for tax purposes 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 2017 taxable income. Consider billing late in December or delaying the delivery of certain products or services until January. Another option: Pay some 2018 costs in advance—for example, if you're going to a trade show in early 2018, you may be able to pay registration fees in 2017. Alternatively, if you expect your business to be more profitable in 2018 than this year, you might consider accelerating cash collection this year and delaying deductible expenses until the beginning of the new year.
5. 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 usually equal to the fair market value of the property donated.
3 Questions to Ask Your Advisor
- What is the maximum contribution I can make each year to an individual 401(k) account?
- How can I set up a retirement plan that covers my employees as well as myself?
- Could it make sense for me to purchase new equipment for my business before the end of the year?
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