Tax Strategies for Business Owners
Small Business Accounting - Tax planning is the process of looking at various tax
options in order to determine when, whether, and how to conduct business and
personal transactions to reduce or eliminate tax liability.
Many small business owners ignore
tax planning. They don't even think about their taxes until it's time to meet
with their accountants, but tax planning is an ongoing process and good tax
advice is a valuable commodity. It is to your benefit to review your income and
expenses monthly and meet with your CPA or tax advisor quarterly to analyze how
you can take full advantage of the provisions, credits and deductions that are
legally available to you.
Although tax avoidance planning is
legal, tax evasion - the reduction of tax through deceit, subterfuge, or
concealment - is not. Frequently what sets tax evasion apart from tax avoidance
is the IRS's finding that there was fraudulent intent on the part of the
business owner. The following are four of the area’s most commonly focused on
by IRS examiners as pointing to possible fraud:
- Failure to report substantial amounts of income such as
a shareholder's failure to report dividends or a store owner's failure to
report a portion of the daily business receipts.
- Claims for fictitious or improper deductions on a
return such as a sales representative's substantial overstatement of
travel expenses or a taxpayer's claim of a large deduction for charitable
contributions when no verification exists.
- Accounting irregularities such as a business's failure
to keep adequate records or a discrepancy between amounts reported on a
corporation's return and amounts reported on its financial statements.
- Improper allocation of income to a related taxpayer who
is in a lower tax bracket such as where a corporation makes distributions
to the controlling shareholder's children.
Tax Planning Strategies
Countless tax planning strategies
are available to small business owners. Some are aimed at the owner's
individual tax situation, and some at the business itself, but regardless of
how simple or how complex a tax strategy is, it will be based on structuring
the strategy to accomplish one or more of these often overlapping goals:
- Reducing the amount of taxable income
- Lowering your tax rate
- Controlling the time when the tax must be paid
- Claiming any available tax credits
- Controlling the effects of the Alternative Minimum Tax
- Avoiding the most common tax planning mistakes
In order to plan effectively, you'll
need to estimate your personal and business income for the next few years. This
is necessary because many tax planning strategies will save tax dollars at one
income level, but will create a larger tax bill at other income levels. You
will want to avoid having the "right" tax plan made "wrong"
by erroneous income projections. Once you know what your approximate income
will be, you can take the next step: estimating your tax bracket.
The effort to come up with
crystal-ball estimates may be difficult and by its very nature will be inexact.
On the other hand, you should already be projecting your sales revenues,
income, and cash flow for general business planning purposes. The better your
estimates, the better the odds that your tax planning efforts will succeed.
- Lower your Taxes on Business Income
- Maximizing Business Entertainment Expenses
Entertainment expenses are
legitimate deductions that can lower your tax bill and save you money, provided
you follow certain guidelines.
In order to qualify as a deduction,
business must be discussed before, during, or after the meal and the
surroundings must be conducive to a business discussion. For instance, a small,
quiet restaurant would be an ideal location for a business dinner. A nightclub
would not. Be careful of locations that include ongoing floor shows or other
distracting events that inhibit business discussions. Prime distractions are
theater locations, ski trips, golf courses, sports events, and hunting trips.
The IRS allows up to a 50% deduction
on entertainment expenses, but you must keep good records and the business meal
must be arranged with the purpose of conducting specific business. Bon
appetite!
Important Business Automobile
Deductions
If you use your car for business such
as visiting clients or going to business meetings away from your regular
workplace you may be able to take certain deductions for the cost of operating
and maintaining your vehicle. You can deduct car expenses by taking either the
standard mileage rate or using actual expenses.
The mileage reimbursement rates for
2012 are 55.5 cents a mile for business, 14 cents per charitable mile and 23
cents for moving and medical miles.
If you own two cars, another way to
increase deductions is to include both cars in your deductions. This works
because business miles driven are determined by business use. To figure
business use, divide the business miles driven by the total miles driven. This
strategy can result in significant deductions.
Whichever method you decide to use
to take the deduction, always be sure to keep accurate records such as a
mileage log and receipts. If you need assistance figuring out which method is
best for your business, do not hesitate to contact us. Happy driving!
Increase Your Bottom Line When You
Work At Home
The home office deduction is quite
possibly one of the most difficult deductions ever to come around the block.
Yet, there are so many tax advantages it becomes worth the navigational
trouble. Here are a few common tips for home office deductions that can make
tax season significantly less traumatic for those of you with a home office.
Try prominently displaying your home
phone number and address on business cards, have business guests sign a guest
log book when they visit your office, deduct long-distance phone charges, keep
a time and work activity log, retain receipts and paid invoices. Keeping these
receipts makes it so much easier to determine percentages of deductions later
on in the year.
Section 179 expensing allows you to
immediately deduct, rather than depreciate over time, up to $139,000, with a
cap of $560,000, in 2012 worth of qualified business property that you purchase
during the year. The key word is "purchase". Equipment can be new or
used and includes certain software. All home office depreciable equipment meets
the qualification. Also, if you purchase more than $139,000 in equipment, you
can expense the first $139,000 then depreciate the rest. In addition, a
"Bonus Depreciation" of 50 percent is allowed on qualified assets
(new equipment only--no used equipment and no software) placed in service
during 2012.
Some deductions can
be taken whether or not you qualify for the home office deduction itself.
Consider meeting with a tax professional to learn more about home office
deductions. For no obligation free consultation contact
us today!
Amare
Berhie, Tax Advisor
612-282-3200
866-936-0430
Toll Free
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