The major March and April tax deadlines might seem like distant ships on the horizon, but for wise small business owners, the end of the year is prime time for tax planning. Why? Because depending on the success your business has had this year and the success you anticipate having in the next, there are many financial strategies that can both benefit your company and reduce its tax spending—but only if they are implemented before the end of the year.
So get your books in order and make an appointment with your tax advisor to see if any of these small business tax strategies will work for you.
Switch to an S Corporation
A large percentage of small businesses operate as Limited Liability Companies—LLCs—but sometimes the tax benefits of an S corporation structure are financially more rewarding. (Sole proprietorships or partnerships usually end up reporting 100 percent of the business’s earnings as subject to self-employment tax, versus just the portion of income paid out as salary with an S corp structure.)
The IRS allows some entities to retroactively elect the S corporation model for the year, which can result in significant savings by reducing the self-employment tax the business’s owners are subject to.
Move Your Office Back Home
Some of the best tax planning involves shifting business expenses from the nondeductible category to the deductible. For businesspeople who spend most of their time on the road visiting clients, forgoing a rented office space for a setup in your home’s den can be a prudent move. First, you can take the home office deduction. Second, you can increase your automobile expense deductions, because the first and last trips of the day no longer qualify as a commute—so all trips in or out to visit clients would qualify as deductible.
Make Any Needed Repairs
Under current IRS code, the entire cost of a repair made to a business asset is deductible. However, improvements to business property must be capitalized. To maintain the distinction between repairs and upgrades, try to separate the work—if you have money in the budget and repairs that you have been putting off, the end of the year is the time to do them. This will offset your taxable income for the year.
Consult Your Tax Pro
Specific tax breaks for businesses and business owners expire regularly—and they end on December 31 of the calendar year, not with the April tax deadline. Your tax professional will be up to speed on which major breaks are ending this year and what, if anything, your business can do to take advantage of them before that happens.