50 Year-End Business Tax Savings Tips
- Set aside time to plan
Book an appointment in your calendar to work on you and your company’s year-end items. For example, you could block off an entire day or you could enter multiple 1-hour appointments over the course of a week or two. Weekends are usually packed with personal appointments and family time. In any case, you should ensure that you have ample time to complete your analysis prior to the deadline of December 31.
- Dissolve an unused Company (LLC or Corporation)
Do you have an unused company, such as an LLC or Corp? It might benefit you to dissolve it before the New Year. You could close its tax year by December 31. It wouldn’t have to file any future tax returns beyond the final return. It also would avoid state income taxes. Finally, it would avoid the annual report requirement and fees. Be sure to cease all business in the company name and close all company bank accounts. You can easily dissolve it by visiting www.sunbiz.org.
- Incorporate This Year
There is time to form a new entity and have it registered for the 2017 year. You may want to do this to ensure you acquire the name of your choice.
- Employee Gifts and Bonuses
Hopefully the business has had a good year and the staff earned its bonuses. It is not necessary to give employees Christmas or End-of-the-Year bonuses. It is entirely voluntary. If you give a food item, it is not income to the employee, but the cost is deductible to your business. However, any non-food gift is just the opposite. While the business still gets a deduction, the value is income to the employee and has to go on his or her Form W-2 at the end of the year. You cannot give a Form 1099. You also must pay social security taxes, Medicare taxes, and make federal withholding. Depending on the employee’s annual salary, you probably should withhold 25%, 28%, or 33%, or more.
- Gather prior years’ returns
In preparation for the business’s annual income tax filings, assemble the prior years’ returns. They will serve as a handy starting point for the current year’s tax return. They also should be reviewed
- Check Social Security Numbers, EIN numbers, and Correct name spelling
It is a good idea to verify social security numbers and addresses in December. You will need these for your Forms W-2 and 1099. Ask your employees and vendors to check for accuracy when you make your December payments to them.
- Business Gifts
Businesses can give gifts to customers, clients, or vendors. However, its deduction is limited to the first $25.00 per person or entity. The rules are completely different than for employee gifts. There is no special deal for food items.
- Ending Payroll on December 31
Many businesses want to end payroll on December 31. It is not necessary to do that. If you pay weekly, you can just do a regular payroll for the prior week, and the rest of the hours worked in December can be paid in January. Nevertheless, for those of you who want an exact cut-off, here are the rules: The paycheck must be dated in the current year. It also must be available for employees to pick up before the end of the year. You do not have to actually put it in their hands, and employees do not have to actually pick up their checks or deposit their checks, but paychecks must be available for employees to pick up if they want. If you normally mail paychecks, they must be postmarked by December 31. If you use direct deposit, instead of paper checks, the funds must be put into employees’ bank accounts by December 31.
- Accelerate or Defer Income and Expenses
If your business had a good year, you may want to try to accelerate some expenses to reduce your tax liability in the current year. If revenues were lower, you may want to consider accelerating revenue (income). You should speak with your tax advisor on how to do this.
- Review the financial health of your business.
You should compare your revenue, expenses, and pre-tax income, year-over-year. This means 2017 versus 2016 and 2015. To make proper evaluations, you’ll need to evaluate whether the current accounting system is sufficient.
- Review your Financials and Record keeping System
Has your business graduated from spreadsheets to QuickBooks onward? You should consider whether your current system adequately reports your financial performance to permit you to make decisions.
- Review your personal and company retirement plans
Your business may have numerous retirement plan options. This includes a 401(k) or SEP-IRA. Make sure you understand how each works and the tax advantages and disadvantages. Furthermore, should your business consider and ESOP, or another employee benefit plan? ESOPs can allow the business employees to own a percentage of the stock as part of their retirement. The business owner also could get a tax deduction for selling his or her stock to the employees.
- Make an inventory list of products, supplies, and equipment
It would most certainly benefit any business to have inventory numbers as part of its ongoing operations. However, some businesses rely on sales data, but do not conduct physical counts. It might be a good idea to conduct a physical inventory count for several reasons. Also, the business could count its supplies and equipment. You may want to take photographs for insurance purposes and evaluate the condition of the equipment. You should compare your results to your balance sheet.
Consider the implications of cancellation of debt (COD) income on taxable income. Cancelation of debt owed to another is considered income to the debtor in many cases. It may depend on whether the debt was recourse or not, and whether property securing the debt was collecting.
- Review your insurance policies
You may have several insurance policies including business liability, professional malpractice, Errors & Omissions, Notary Public insurance, completion bonds, workers’ compensation, life insurance, disability insurance health insurance, premises liability insurance, auto insurance etc. You should review your coverages and limits of liability to ensure you are adequately covered. It may be possible to hire an independent person to complete a study that you could use to lower your premium. Additionally, you should check to see whether your insurance policies cover data theft and destruction of data.
Check to make sure you follow applicable laws and regulations. For example, many industries are required to deliver privacy policies on how customer data is used. Furthermore, the Fair Debt Collection Practices Act mandates how customers can be contacted for collections. However, the FDCPA may not be applicable to you.
- Write off Bad Debts
Nearly every business has accounts that can’t be collected for many reasons. You should be monitoring your accounts receivable and collecting or referring the accounts to collections. If the account cannot be collected and you booked it as revenue, the consider writing it off. This does not apply to cash basis taxpayers.
- Consider disposing of a passive activity
Consider disposing of passive activities to reduce taxable income if doing so will allow you to deduct suspended passive activity losses.
- Consider whether you need to increase your basis
Consider whether you need to increase your basis if you own an interest in a partnership or S corporation, so you can deduct a loss from it for this year.
- Consider Bonus Depreciation
Consider making expenditures that qualify for the business property expensing option. For 2017, the expensing limit is $510,000 and the investment ceiling limit is $2,030,000. Expensing is available for most depreciable property (not buildings), off-the-shelf computer software, and qualified real property qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. The expensing deduction is not prorated for the time the asset is in service during the year.
Consider whether you’re eligible for expenditures that qualify for 50 percent bonus first-year depreciation if bought and placed in service this year. This bonus depreciation includes: Qualified reuse and recycling property; Qualified second generation biofuel plant property; Certain qualified property placed in service before January 1, 2020; and Certain plants bearing fruits and nuts.
- Take advantage of the de Minimis safe harbor election.
The so-called book-tax conformity election enables you to expense the costs of lower-cost assets and materials and supplies. To qualify for the election, the cost of a unit of property can be as high as $5,000 with an applicable financial statement. If not, the cost of a unit of property can’t exceed $2,500.
- Defer Income
Consider deferring income until next year if doing so will reduce you company’s tax liability.
- Accelerate Income
Accelerate income to create a small amount of net income. A corporation that anticipates a small net operating loss may find it worthwhile to accelerate just enough of its income, or to defer just enough of its 2016 deductions, to create a small amount of net income. This will permit the corporation to base its future estimated tax installments on the relatively small amount of income, rather than having to pay estimated taxes based on 100 percent of its future taxable income.
- Buy Needed Equipment
Write off business purchases for your taxes. Buying needed equipment this year and putting it to use reduces your taxes by creating expenses.
- Pay Bills Early
For cash-basis taxpayers, and in certain cases for accrual-based taxpayers, business-related bills such as rent, telecommunications, and utilities become deductions when paid.
- Make an S-Corp Election
The S-Corp election changes your entity’s classification from either a disregarded entity or a corporation. This election may reduce your future tax liability.
- Review entity choice
Determine whether your company is a pass-through entity or separately taxable entity for federal income tax purposes. Then consider whether operating as a different entity could reduce your tax liability. In some cases, it’s as simple as filing an election. In other cases, you may need to form a new entity.
- Evaluate accounting methods
If your company is eligible for either cash or accrual accounting, consider whether changing accounting methods would provide a tax savings. Normally, cash method produces greater income deferral. The accrual method could be better if accrued expenses tend to be higher than its accrued income.
- Claim the manufacturers deduction
This deduction isn’t just for manufacturers, so don’t overlook it. It is commonly referred to as the Section 199 or domestic production activities deduction. It allows a deduction of up to 9% of income from qualified production activities. These include many activities associated with constructing or substantially renovating real property located in the US.
- Make Deductible Contributions to charity
Charitable contributions can reduce taxable income. There are many factors to consider such as your income, the amount of the deduction, whether the deduction is limited, and whether you should give property like appreciated stock or a used automobile directly to the charity
- Sell investment losses to offset capital gains
Consider selling investments that have declined in value to offset corresponding gains. You would need to consider your tax bracket, whether the investments are passive, the amount of the losses versus gains, and whether you have carryforwards.
- Consult your professionals and tax advisors
Rather than waiting until after December 31 to discuss what taxes you might owe, speak to your advisors now so that he or she can advise you on what steps to take to minimize taxes before the year passes and it is too late. Consider your strategies as part of the whole picture versus in a vacuum. Don’t simply consider taxes. Consider whether, for example, it might make sense to continue to hold a stock before selling it. Speak to your attorney as well for a year-end checkup.
- Consider whether your current Advisors meet your needs
If you are self-preparing your tax returns, consider hiring a professional. You may have outgrown your current advisor. If your professional serves a certain market, and you’re just too big, don’t let loyalty get in the way of progress. At least consider consulting with another advisor and seeing if he or she will work with your existing advisor.
- Get Your Bookkeeping Finished in December
Part of your year-end tax strategy is to have a good understanding of your company’s financial health. Focus on getting your books up-to-date and accurate. Schedule time with your CPA for year-end advice. If your books are a mess, be sure to contact us to help you get them in order.
- Inventory Write-Offs
Depending on your accounting process, you may wish to check inventory for goods that have been damaged or have become obsolete.
- Review your accounting methods
There are many different methods for recognizing income and expenses. Public companies employ numerous accounting methods. Conduct a comprehensive review of your accounting methods. Identifying a more favorable method can allow you to accelerate a deduction while rates are high and defer income into a future year when rates might be lower.
- Cost Segregation Studies
Buildings are depreciated over 29 or 39 years. An opportunity for tax savings might be found by identifying and reclassifying building assets that can be depreciated using shorter lives. A cost segregation study can often identify scores of building components that can be segregated and depreciated sooner.
- Deduct bonuses before the year-end
If the tax law changes next year, then consider paying bonuses to help reduce income and correspondingly taxes in the current year.
- Review sales and use taxes for missing refunds
It is entirely possible that you’ve paid sales tax on items that are non-taxable. Review the categories of items you purchase against sales tax exemptions. If’ you’ve already paid the tax, it may be possible to claim a refund.
- Review your property taxes
This includes real and personal property taxes. Your property tax valuations are based on assessed values. The property appraiser may have raised those values in the past year. So, you’ll need to make a timely assessment to contest the values.
- Perform a reasonable compensation study
If you own a corporation and work in the business, you may be required to pay a salary to yourself. A reasonable compensation analysis can confirm your salary meets IRS standards.
- Consider alternatives to equity pay for key employees
A phantom stock plans credits employees with stock units that represent a share of the firm’s stock. Those stock plans promise to pay the employee the equivalent of stock value in the future. Performance-based cash payment plans promise employees cash bonuses if performance goals are met.
- Purchase a car or truck
Purchasing a car or truck for business use can permit a deduction that can reduce your taxes.
- Contribute to a Retirement Plan
Make payments to a retirement plan or set one up before the year-end to reduce your income for the year.
- Disaster relief
Hurricanes and natural disasters unfortunately leave devastation in their paths. The Disaster Tax Relief and Airport and Airway Extension Act of 2017 provides additional relief. Personal casualty losses need not exceed 10% of AGI to qualify for a deduction. The Act also eliminates the current law requirement that taxpayers must itemize deductions to access this tax relief—it does so by increasing an individual taxpayer’s standard deduction under Code Sec. 63(c) by the net disaster loss. The portion of the standard deduction attributable to the net disaster loss is also allowed for alternative minimum tax (AMT) purposes. The Act increases the $100 per-casualty floor to $500 for qualified disaster-related personal casualty losses. The Act allows victims to make qualified hurricane distributions from their retirement plans of up to $100,000.
- Clean up your chart of accounts
If you have too many accounts or too many vendors in your chart of accounts and vendor lists, year-end is an excellent time to remove unused ones. Creating false vendors is also a source of fraud. So, look for suspicious activity such as recent payments to vendors who have not done work in a while, or names of vendors or employees you don’t recognize.
- Scan Unused Documents
Eliminate documents in accordance with your record retention policies. Also, consider scanning important documents, or eliminating documents altogether. Conversely, consider maintaining paper files in cases where digital records are insufficient.
- Review your email policies
A corporate hack can significantly interrupt business operations and can put personal and business identities and reputations at risk. Consider implementing and updating your email policies about visiting known and trusted websites, downloading software, and clicking on links in emails.
- Ensure employee files have I-9 Forms and updated W-4 withholding certificates
Ensure that you have the required documentation from the Department of Labor for each employee. This includes an I-9 and W-4 Withholding certificate. W-4s should be updated annually.
- Make sure your company officers are in tax compliance
This seems obvious, but know that in the event of an audit, the IRS has the right to request the tax returns of highly compensated individuals and company executives.
- Exercise Caution
Year-end tax planning must consider a business’s situation and planning goals.