It's almost time to ring in the new year, and small business owners always want to know...what can I do now to reduce my tax bill? The good news is, it's not too late to put a few strategies into place that can improve your business and lessen your tax burden. Don't think you can pull them off by December 31st? That's ok too...it's never too early to think about tactics for the 2017 tax year.
Manage Your Income & Expenses
Small businesses often use the cash basis of accounting, which means you recognize (and are taxed) on income and expenses when they are actually received or paid. The easiest tax planning for cash basis taxpayers is to simply pay more expenses at the end of the year, or delay the receipt of income when possible. This strategy could be utilized by paying bonuses or prepaying 2017 expenses.
Upgrade Your Assets
Purchasing equipment and technology can also provide big tax savings through depreciation, as well as provide new efficiencies and improvements for your business. New assets that cost under $2,500 per unit can be immediately expensed. If items cost more than $2,500 per unit, a small business can likely take advantage of the Section 179 deduction that allows an immediate write-off of up to $500,000 of qualifying purchases. In some cases, bonus depreciation may be preferred, which allows 50% of the purchased equipment to be taken as depreciation in the current year. Take note that the new assets must be purchased and put into service before the end of the year in order to take the deduction.
Leverage Net Operating Losses
Incurring more expenses than income isn't always a bad thing. These net operating losses can be applied to taxes you've paid in the past, or saved and put toward your future tax liabilities. There are distinct NOL rules for various business types, so be sure to consult a tax professional for details.
Implement a Retirement Plan
Small business owners can establish and use retirement plans to defer taxes until they retire — when tax brackets will likely be lower. An added benefit for small business owners is that contributing to a properly designed IRA or self-employed 401(k) can enable you to deduct up to $53,000 (in 2016) in personal contributions. There are several options available for small business owners that want to begin a retirement plan. A careful review of your goals and the costs of administration should be considered to determine which plan is right for you.
Establish a Medical Reimbursement Plan
On December 7th, Congress passed the 21st Century Cures Act that would allow small employers to reimburse employees under a qualifying health reimbursement arrangement (HRA) for the cost of health care expenses, including insurance premiums. Citing authority from the Affordable Care Act and notices from the Department of Labor, the IRS had begun penalizing small businesses for health insurance reimbursements at a rate of $100/day/employee (up to $36,500/year). This penalty will be eliminated in the new law. President Obama is expected to sign the legislation soon, and it will go into effect January 1, 2017. Further details and guidance are expected for those that want to implement an HRA that covers health insurance premiums in 2017.
Keep in mind that these strategies are based on current law and are subject to change under the new presidential administration. It is generally predicted that taxes will be lower in 2017, so taking advantage of expenses and delaying income may be the best course of action this year. In any case, it's imperative that you double-check your figures and follow all IRS rules regarding credits, deductions and deferments as mistakes can be costly.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.