We’ve learned over the years that small businesses are severely limited on the number of options that they have to reduce their tax burden. This, however, doesn’t mean that businesses can’t do quite a few things to reduce the burden of taxes with some timely tax planning tips. With all of the recent news about new tax legislation we thought it would be good to share some of our tax planning tips that endure the test of time.
Four things to keep in mind with tax planning
- Permanent savings reduce total tax burden over lifetime of business
- Timing savings defer tax burden from one reporting period to a later period
- Most tax savings require cash outlays and very few have no cash flow impact
- No tax savings can justify taking the risk of a criminal investigation that could come about as a result of intentionally filing a materially false tax return.
Tax planning is easier if you have the right context
The IRS wants to know all about your income and it’s up to you to present it in the right context. Have you elected to file as an S – Corp? What activities does your business conduct and how do expenses flow through the business? How actively involved are you in creating revenue? Answering these questions in advance will help you identify your opportunities for tax savings and also present your information in the right context for the IRS.
Four ways to pull money out of the business without creating a taxable event
The S-Corp election as discussed can reduce the impact of a taxable event, compensation, but there are other ways to take money out of the business without creating a taxable event although they all have a cash flow impact and should be planned for in your business’s financial plan. I have identified four opportunities that every business owner should consider:
- Identify all opportunities for out of pocket reimbursements including home office use, mileage reimbursement, and personal business related training (an accountable plan will keep things clean).
- Fund a retirement account
- Reimbursement for Health insurance Premiums and HSA contributions
- Paying for an Employee’s education
Why do so many talk about S – Corps?
Electing to file as an S – Corp can provide some significant savings to your tax bill without impacting cash flow. The most common savings is the impact to self employment taxes. For example, if you are a single member LLC, all business income flows through to your personal tax return as ordinary income and you will not only have to pay income tax, but you will also have to pay self employment tax (social security and Medicare). If you elect to file as an S-Corp while remaining a single member LLC the same holds true to an extent since you would pay yourself a fair salary and pay all of the appropriate payroll taxes. Other distributions would be treated effectively as dividend and would not be subject to the self employment taxes. It is worth noting that some states have tax rules that can complicate the S – Corp election. Consult with a knowledgeable CPA to know where you stand.
Attractive taxable events
Taxable events are transactions that result in a tax consequence. Some are attractive, relatively speaking; whereas, others are not. Examples of more attractive options are:
- Employing a child (follow labor law)
- Company paid HSA contributions
- Ability for per diem to be used (Sole Proprietor, Single Member LLC, Partner)
- Tax credit for setting up certain retirement plans
The Shared Finance Center provides outsourced accounting, bookkeeping and CFO support to small business owners and in doing so we heavily focus on maximizing cash flow. If you think that this post would be helpful to anyone you know, please pass it along. Also please follow our blog for regular tips to grow your business.