End of Year Tax Planning for Small Businesses in Florida
The end of the business year means a lot of things, but for small businesses, it means considering your options, reviewing your finances, and making key decisions that will affect your business for the year to come. Ideally, you will have a CPA to help you through the difficult waters of tax season navigation, but either way, you can consider the following steps as part of your end of year tax planning.
Importantly, small businesses are especially vulnerable in the face of tax decisions, and key points surrounding income tax, deductibles, and tax credits can make or break your profitability. Spending extra time to make optimal decisions for your finances can help to ensure that you maintain maximum profitability.
Balance Your Taxes
Most small businesses pay on a cash basis, meaning that you add expenses when they are charged and revenue when it is paid. You can utilize this to save money by either holding or deferring payments, increasing your revenue by increasing expenses, or holding off on adding your expenses until the next year. The route you take should entirely depend on your goals and the following year. This does mean that you should typically consult a CPA and ask them for help with your strategy.
Moving Into a New Tax Bracket – If your current revenue stream is set to push you into a higher tax bracket for the next year, you can withhold deductibles and add as much revenue as you can for this year and reduce your income for 2017. This can help you to reduce your taxes a great deal when you're paying more.
Deferring Income – On the other hand, if your income is likely to be less in the next year, or you have a significant deductible that you are planning for 2017, you can defer your income and add it in for January. This will reduce your taxable income for 2016 and raise it for 2017, when you intend to have less income.
Maximize Your Expenses – If you need to save money on taxes for this year, you can maximize your expenses by charging items that you need for your business. However, it is important to consider that you shouldn't buy items you don't need, simply because you will usually spend more this way. Conversely, you can also defer your expenses to reduce your income for the next year if your taxes for this year are already manageable.
Tip: Discuss your current options with a CPA and plan so that you can balance everything to the best benefit of your business for both years.
Maximize Your Deductibles
Deductibles are every small business owner's best friend. Chances are that if you're operating in the state of Florida, you don't pay corporate tax (unless you're a C corporation), which means that you will file your business taxes as part of your personal return. This in turn means that you can maximize your deductibles by including both personal and business deductibles on your return.
Are You Married? - If your spouse is not an operating member of your business, you should consider discussing your options with your CPA to see if you're better off filing separately.
Saving for Retirement – You can deduct up to $5,500 from your taxes when you invest it in a traditional or a ROTH IRA.
Costs – Most business costs qualify as a business deduction and should be used to maximize these to benefit the current or the next year. While this does fall under balancing your taxes, you should also consider reviewing your available deductions to ensure that you are aware of everything you can deduct. For example, while many restaurant owners realize that they can deduct the cost of raw ingredients, many fail to deduct condiments, frying oil, and other 'accessories' to cooking. You can review your deductibles with your CPA and check what you qualify for via the IRS website.
Keep a running list of all of your costs and expenses throughout the year so that you can easily go over your entire expenses at the end of the year. If you haven't done so, you can still deduct anything that you have receipts for.
Tip: If you're moving into a higher tax bracket next year, consider saving a large purchase for then. Section 179 allows you to use the entire deduction for machinery or large equipment purchases of up to $500,000 the year of the purchase, which you can use to keep your taxes lower.
Labor - Almost all labor costs are fully deductible. You can deduct items including employee salary, wages, bonuses, tips, sick leave, vacation pay, and health insurance. If you run a restaurant, bar, or otherwise hire employees in a tipped industry, it is crucial that you ensure all tips are being reported. One method, to ensure that you aren't liable in case employees lie about their tips, is to request that all employees sign off on the tips they received.
Similarly, you should review your third quarter employee wages to ensure that your reemployment tax deductions, sales and use tax collection, and other paperwork is in order before you file any labor cost deductions.
Use Available Tax Credits
Tax credits allow you to deduct general expenses from your taxes based on Federal credits. These can help you to reduce your taxes for investments into your business, hiring disadvantaged employees, health care, and some other items. You should discuss your options with your CPA as they can greatly vary depending on your business.
Research and Development – Research and Development is one of the most underutilized tax credits, but many businesses can qualify for as much as a 20% credit on funds spent on business research under Title 26, Code 41.
Repairs and Remodels – Did you know that if you maintain individual records of repairs and remodels and separate them from new build costs, you can qualify for as much as a 75% tax credit? Most small businesses qualify for this safe harbor credit under section 162 of Revenue Procedure 2015-56, and can capitalize the remaining 25% under section 263(a).
Health Care – The Small Business Healthcare Tax Credit is designed to help small businesses with fewer than 25 employees receive a tax credit for health care expenses. While you do need a qualifying arrangement, you can receive up to 50% of costs as a tax credit.
Review Your Books Before Filing
It is crucial that you review your books so that you understand your expenses, have double checked capitalization, and are using depreciation to reduce your tax. You typically need a CPA to do this as calculations are complex.
Plan for Tax Savings for 2017
Planning your purchases, investments, and other key tax decisions around your finances is crucial to ensuring that you have the best tax outcome for the year. A good tax strategy can greatly reduce what you pay by helping you to make the right decisions throughout the year. For example, if your income is going up, you might want to consider additional investments, changing your business type, or taking additional steps. On the other hand, if you are operating an LLC, it might not be right for you.
Discuss your tax needs with your CPA to check if an LLC actually benefits you. If you're earning over $100,000 per year, the protection offered by an LLC might not be worth the additional 15% FICA employment tax (to hire yourself).
Maintaining great records, going over your books with a CPA on a regular basis, and making the right decisions throughout the year will help you to save a great deal for the following year.
Do you need help with your end of the year planning or accounting? Camputaro and Associates specialize in small business accounting and will walk you through your deductions, tax credits, and options, to benefit your business for this year and next. Contact us for a free, no obligation consultation.
Camputaro and Associates
Certified Public Accounting Firm
136 N. Orchard Street, Suite 8
Ormond Beach, FL 32174