Business Tax Planning Strategies

Having good business tax planning strategies can help sustain the longevity of your company. The IRS is ever present, looking over your shoulder with its hand out to take your hard earned profits. However, effective planning can help minimize the damage. Smart tax planning can make or break the success of your company.  Let’s look at some of the strategies that can save you money…

To minimize your taxes, there are a number of business tax planning strategies available to the small business owner. Many are detailed in finance books and online resources. However, you’d be wise to consider turning to your certified public accountant (CPA) to put together a high impact tax plan for you; your time is better spent growing your business rather than trying to create a complex tax planning strategy on your own.

There are aspects of tax planning applicable to all small businesses, regardless of your field of operation. Some deductions and savings strategies, however, are specific to certain business areas and should be uniquely constructed based on the unique nature of your operation.

Here are some general tips that you might benefit from as your business tax planning strategies are created:

Small Business Tax Deductions – Examine the day to day operations of your company. Reviewing your cash outflows, look for tax deductions you might not be taking advantage of. Additionally, sometimes all it takes is a slight reorganization of how you use business assets to save you thousands of dollars in tax savings.

Auto Expense Deductions – The current iteration of the tax code allows for standard mileage rate expense claims or actual expenses incurred. The deduction amount you are allowed at tax time should dictate which method you choose to use. Newer cars typically have higher values and allow for larger actual expense deductions, but let the numbers decide your choice.

Books Legal Fees and Professionals – Most know that you can deduct professional fees from services such as attorneys and accountants, but your business can also deduct education expenses that relate to these services. If you buy business books or education services that help you maximize your use of these professional services you can deduct these expenses as well.

FIFO and LIFO Methods. These are two inventory valuation methods provided by tax law. Choosing the right inventory valuation method could mean additional tax savings for the business. Inventory valuation is a key in business to tax planning – goods purchased for re-sale during the year need to be reduced by the amount remaining at the end of the year.

FIFO or the First-In, First Out method removes items that were purchased earliest from inventory while LIFO or the Last-In, Last Out method does the opposite. In FIFO, the remaining inventory is valued at its most current cost. IN LIFO, it is the other way around, the remaining inventory is valued at its earliest cost paid in that year.

In times of rising costs, LIFO is the preferred inventory valuation method as it reduces income and taxes by placing a lower value on the remaining value and higher value on the cost of sold goods. During times of deflation, FIFO method is preferred.

To take advantage of tax savings, companies are allowed to switch from FIFO to LIFO anytime. To switch back, however, the company has to wait 10 years or ask the permission from IRS before they can switch back to their previous inventory valuation method.

Equipment Purchases – IRS Code Section 179 states that an allowable amount of $500,000 in equipment purchases is allowed for business to deduct during the year with the purchases are made. This tax incentive is very advantageous for businesses to take advantage of in order to increase their deductions for business expenses – reducing taxable income and tax liability. All important equipment purchases up to the deduction limit can be done even at the year end and still be fully deductible. This incentive applies to personal property use for business excepting automobiles and real estate.

Meals and Entertainment – By maximizing business entertainment expenses you also can save on your taxes. Did you know that the IRS allows you to deduct 50% of meals and business entertainment expenses? However, the IRS requires correct documentation of these expenses to be considered as tax deductions. As long as you conduct business before, during or after a meal in a quiet business-appropriate place or restaurant you are eligible to deduct the expense for tax purposes.

Business tax planning is legal but tax evasion is not. Tax evasion is when a business reduces its tax through fraud, deceit, or concealment. When the IRS finds out about a fraudulent tax declaration, understand the consequences – your breaking the law. Working with a knowledgeable, experienced CPA to help you enact your tax planning strategies will help to assure you remain within the law and penalty free.

The IRS examiners look for red flags they consider as an indicator of possible fraud. Failure to report or declare the correct amount of income, filing a claim or large deduction for charity without proper verification, overstatement of travel expenses, irregularities on book keeping records and financial statements, and improper income allocations to employees who are relatives such as children or a spouse are just some of the indicators that might trigger an IRS audit.

We recommend business tax planning strategies that ethically minimize your tax exposure. There are hundreds of different strategies that can save you money, but effective tax planning is about creating a proactive strategy that is unique for you. Do not be afraid to ask questions, read and dissect the rules that relate specifically to you, but be sure to get the help you need to ensure you don’t pay more than you have to.


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