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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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