Tax Planning Strategies
As we move towards the end of the year there are many things you can do as a taxpayer to minimize your tax liability. It is especially important for small businesses to have a review of their projected income tax for the current year and then to develop a tax plan based on the tax projection. As a small business there are some basic tax strategies that can be implemented that can significantly reduce their taxes. The following strategies can be implemented by almost any small business.
Accelerate deductions. One time tested strategy for small businesses is to accelerate deductions into the current year. As a business gets closer to the end of the year it may be beneficial to accelerate or accumulate deductions for the current year. The way this is accomplished is by paying or accruing all eligible expenses by the end of the year. If you are a cash basis taxpayer this means paying all outstanding payables and maybe pre paying certain expenses. If you are an accrual basis taxpayer it would entail accruing as many eligible expenses at year end.
Defer income. Another commonly used strategy is to defer income from one year to the next. This is accomplished by delaying billing at the end of the year by making sure that customer payments are shifted from the current year to the subsequent year. This strategy is not for every business as many businesses do not have control as to when they can receive customer payments but for some businesses that do have some control and flexibility it can be beneficial
Retirement plans. Retirement plans are a common tax planning tool that can be used for both individuals and small businesses. If possible, all taxpayers should take advantage of the tax benefits of a retirement plan. Most retirement plans provide tax deferral which mean that you are essentially delaying paying the tax to a later date. With these type of plans you typically receive a tax deduction or a salary deferral. Some retirement plans are considered tax free in that when you draw on the plan the entire distribution is tax free. Some of the most popular individual retirement plans are Traditional Individual Retirement Account and the Roth Individual Retirement Account. Small businesses also can also take advantage of retirement plans such as a 401(k) plan, a SEP IRA, a Simple IRA, and various pension plans.
Fringe benefit plans. These type of plans are beneficial to both the employer and the employee. These plans are set up to benefit both the employee and the employer. Typically the employer sets up the plan and offers the plan to its employees. The employer then pays the employee, usually in the form of income, and the employer gets to deduct the payment and the employee does not have to report the payment as income. The more common fringe benefit plans are employer provided health insurance, group term life insurance, dependent care program, tuition assistance programs, and on the job meals. With all of these type of plans there are many requirements and guidelines.