Tax Planning Tips
Most business owners have a calendar tax year, that is, from January 01 to December 31. From what I am seeing in the market, most business owners have had a very good year. Are you having a very good year? If so, that means you will have taxes to pay and these may be more than last year.
Here are some tax planning suggestions to finish off 2014.
Annualize your most recent Profit and Loss statement
To understand if you need to be proactive with any 2014 tax planning, it’s a very simple two step process. Step one is to run a current Profit and Loss statement that is complete say to the end of September or October (the later the better) and then run the same Profit and Loss for the same period for 2013.
How do they compare? Are there any major variations? Do you expect an increase or decrease in sales and/or expenses through to the end of the year?
If the above is too complicated and you use accounting software, export your data and ask your Enrolled Agent or CPA to give you some feedback.
Start or add to your retirement plan
If you don’t like paying taxes then put some of your money into a retirement plan. Putting money into a retirement plan due to the success of your business comes with complications. Your Enrolled Agent or CPA will have some advice about the tax consequences. If you do your own payroll, you will need to make sure your deductions are correct and that your payroll taxes are paid on time.
You may also want advice from a financial planner how to best invest the money. There are different plans you can use from Individual 401(k) plans to SEP IRAs to SIMPLE plans that may or may not require you to include employees in the plan. If a plan requires employee participation, make sure you are comfortable with it. If the business is doing well and you are considering bonuses or pay increases, opening a retirement plan may be a better option. If you have time, read IRS Publication 560.
Generally everything must be in place by December 31 so start on this now as the professional help you may need may not be available on your schedule…plus it’s more complicated than you may expect.
Thank your employees – legally
A great business is all about great employees. Period. Customers will only keep returning if their needs are met and that’s the role of the employees to ensure that happens.
Because employees are such a valuable asset to the business, treat them accordingly. The IRS has strict rules about what benefits are and are not tax deductible to the business and it’s all available by clicking here – IRS Publication 15-B which is a guide to fringe benefits. For final approval, run your options past your Enrolled Agent or CPA.
Buy new furniture and/or equipment
Last year you were able to deduct up to $500,000 and write it off immediately for what was called a Section 179 Deduction. This year that tax deduction has gone back to the old level of a maximum of $25,000…unless Congress decides to extend the $500,000 before they recess for the year.
Section 179 deduction options include upgrading computers be it hardware or software, office furniture and vehicles.
Do you have the best legal structure
When we start a company we are never sure whether to start as a Sole Proprietor, LLC, Corporation or whatever. We may get advice from a tax professional and/or attorney…or we may not.
As your business evolves and changes, it’s worth looking to see if the current legal entity is the best option. If the business is growing and making money, different legal entities offer different protections.
If you would like a 2 page summary of the different options available to you, click the following link: creating your legal entity.
It is especially important to analyze entity structure if your business is now netting more than $100,000 per year. Keep in mind that if you incorporate, you will now be required to take money out of the business via payroll rather than simple draws. There is a lot more paperwork involved under this status, but the tax benefits and protection that a corporation offers may prove more beneficial. Always discuss these options with your attorney and tax pro before making a decision.
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For more immediate help, you are welcome to send an email to Andrew Rogerson or give me a call on 916 570-2674.