Tax Reduction Strategies

With every business decision that you make, you probably try to calculate how much money you’ll need to spend versus how much money you could save. If you’re considering finally hiring a CPA, you should know that a CPA helps to save you money in many different ways. And, if you already have a CPA, you should know that they are definitely earning their keep. Following are nine ways that a CPA helps save you money, no matter what size business you have.

1. Avoiding IRS Penalties

Did you know that the IRS doesn’t consider ignorance of the law or innocent mistakes to be an excuse? When you make errors on your tax returns, the IRS can and will incur heavy financial penalties, no matter what the reason is. Considering that tax returns are more complicated than ever, it’s more likely that you or your bookkeeper will make mistakes that will result in IRS penalties. When you use a CPA to prepare and tax returns, you can be more certain that you won’t incur IRS penalties.

2. Avoiding Wasted Labor

It will take you, your spouse or your bookkeeper much longer to prepare and file your tax returns than it would a CPA. A CPA does tax returns full- time, year-round. Even when it’s not “tax season,” CPAs are busy helping individuals and companies manage their tax issues. Since you or your office “tax person” are only doing taxes once a year, the learning curve is bigger and much more time consuming. Even your bookkeeper would have to study up on the latest tax laws and reacquaint themselves with the return forms each year before they’d even be able to begin actually preparing your business returns. A CPA helps you avoid this wasted in-house labor.

3. Saving on Time

Do you or your assistant spend hours trying to figure out if certain expenses are tax deductible and if so, how to categorize them on your tax return? A CPA saves you money by sparing you the costly hours spent on trying to figure out and categorize line items during the year. If you have a CPA on hand, you or your assistant

can easily call or send an email to the CPA and find out how to post it in your accounting software. If you don’t use accounting software, your CPA will save you even more money by providing all your accounting services for you as the year goes on.

4. Taking Advantage of Tax Rebates

Tax rebates are often available for certain large items that save on natural resources or provide other sustainable benefits. If you have an office where you occasionally need to purchase things like a furnace, air conditioning units, refrigerators, large-format printers, computers and other high-energy equipment, you could be missing out on tax rebates. Your CPA can help save you money, first, by bringing available tax rebates to your attention, and then by making sure they are correctly applied on your tax returns.

5. Maximizing Deductions

Studies show that many tax filers leave money on the table because they’re afraid to take too many deductions. No matter what kind of business you operate, a CPA can save you a lot of money by maximizing your legal business deductions. Did you get real estate rental income on the side? Your CPA can ensure you take both depreciation and regular deductions for the year. Do you have one or more subsidiaries? Your CPA can make sure you properly report both income and expenses in a manner where you get the most deductions possible.

6. Leveraging Tax Laws

Tax law is so complex that it takes up many volumes in print form. CPAs stay on top of tax laws as they transform from year to year. Your CPA helps you save money by leveraging the tax laws in your favor. For instance, your CPA may be able to save you money by having you change your entity form from a sole proprietor to a C- Corp or S-Corp. Everything depends on your individual circumstances, but CPAs are adept at using tax laws to their clients’ advantage.

7. Spotting Costly Errors

One of the favorite things that CPAs like to do is to spot costly errors on previous returns and get back money for their clients. Note that even if you don’t currently have a CPA, you can hire a new CPA and ask them to review old returns. You can file an amended tax return three years from the date you originally filed, or two years from when you paid the taxes due. You could even possibly get back enough money from a previous error that will offset the cost of your new CPA!

8. Providing Financial Oversight

Do you have a bookkeeper doing your company books? Or maybe you have a small team of admin support who are in charge of payroll, writing checks, etc.? If so, it’s important to have financial oversight over that staff. Unfortunately, internal errors and even embezzlement are quite common, particularly in small offices where owners don’t have time to oversee every financial transaction. It’s very helpful to have a CPA to provide financial oversight to catch mistakes or even intentional mismanagement of your company’s funds.

9. Offering Business Advice

Did you know that you can rely on your CPA for business advice, too? CPAs are experts at managing cash flow, advising on business purchase decisions and helping owners to make decisions that will keep as much money from the tax man as possible. Your CPA can help save you money by ensuring that you’re making wise business decisions and not letting savings opportunities pass you by.

Remember, your CPA isn’t just your go-to person at tax time. They are an invaluable and lucrative resource all year round. You can rely on your CPA to save you money, keep more money in your pocket and help you to grow your business like never before.

As a business owner, you know first-hand that taxes can take a big chunk out of your pocket. No matter how small your business is or how large you grow, you’ll always be on the hook for some kind of taxes. However, the tax code is such that there is always room for strategic tax savings as long as you operate within the laws. Your CPA is the best source of tax-saving strategies, but it can help if you present some of your own ideas, too. Here are some that are worth considering.

1. Consider Hiring Independent Contractors Instead of Employees

Payroll taxes are something every business owner needs to consider before making a commitment to add another employee to the payroll. Payroll taxes are one of the larger taxes that business have to pay, and they come around not once, but usually at least twice a month. One way that businesses have gotten around paying payroll tax is buy hiring independent contractors instead of employees. You don’t have to pay payroll tax on independent contractors that you hire. Of course, there are certain rules about what constitutes an IC and what constitutes an employee, but once you ensure you would be in compliance, you may be able to get by with ICs.

2. Change Your Business Structure

You might be able to save a bundle on taxes just by filling out a few different forms and changing your business structure. Your business entity structure heavily affects how your business pays taxes. You should have considered this when you first formed your company, but if not, now’s the time to re-evaluate it. You may have even changed your business model slightly since forming it, and it could make sense to operate as a different kind of entity. Make an appointment with your CPA to see if this strategy would make sense as far as your business saving taxes.

3. Make Retirement Contributions

Before you file your taxes, see if you have some cash to make an extra retirement contribution by the deadline. This will offset your business income and you won’t have to personally pay taxes on the contribution until you retire, or maybe not at all, depending on your retirement plan. This warrants a call to your CPA so you can see if an extra retirement contribution is manageable and if it warrants the possible taxes saved.

4. Change Your Depreciation Schedule

You may be able to save money on your taxes by changing your depreciation schedule. Accelerated depreciation is a way to save money on taxes. You’ll need to have your CPA work the numbers for you since this is a complex calculation. But if you have significant assets in your business such as a work vehicle, heavy equipment or other assets, it could very well be worth the time to look into it.

5. Look for Tax Credits

There are several tax credits that you could take advantage of if you qualify. You might be able to get a tax credit for going “green,” providing services or access to disabled persons, making certain energy-efficient purchases or offering family leave to employees. Carefully review your services, benefits and purchases over the last year to see if there’s anything that might qualify your business for a tax credit.

6. Get All the Deductions You’re Entitled To

Go through all your receipts for the past year and separate anything that you believe might qualify as a deduction. Pay attention to travel-related receipts and repairs on office equipment. Know that gifts and employee bonuses may qualify as deductions, too. Once you have your full list, present it to your CPA along with the receipts. Be prepared to offer backup and explanations in case your CPA has further questions about the qualification of any particular receipt.

7. Pay Out Bills Before the End of the Year

Does your business have any outstanding bills that are sitting due in your accounts payable? Depending on your business entity, you’ll pay extra taxes on money that’s considered profit sitting in your bank account as of January 1st. Minimize your taxes by paying out bills before the end of the year. If you can handle it cash flow-wise, pay bills that you would normally pay throughout the end of January. This might put a crimp in your cash flow right now, but the tax savings could make this strategy worth considering. Your CPA can best advise you on the course of action you should take.

8. Write Off Bad Debts

If you’re sitting on some accounts receivables that you know aren’t going to get paid and you use accrual accounting, you can write those off as bad debts. Then you can take that bad debt amount and write it off as a tax deduction. Be sure to notify your client of your intent. If they pay later, this creates an accounting issue that will actually cost you money because you and/or your CPA will need to spend time doing a return adjustment.

9. Buy, Buy, Buy

Anther tax saving strategy to consider depending on what kind of business entity you have set up is to make purchases that reduce your profits for the year. Look ahead into the next year and think about anything you’ll be needing to buy. Go shopping and make those purchases now. If they’re large purchases, they could significantly cut down on your tax liability.

Finally, ask your CPA to review previous tax filings if they were done by a different firm in earlier years. There may be some room for savings that could make it worth it to file an amended return. Your CPA is a tax expert and may very well be able to offer you even more ideas for saving taxes for your business. Run all these ideas past your CPA and pay attention to other strategies they may be able to offer. Going forward, keep these strategies in mind so you can continue to make business choices that will positively impact your tax liability.

Small strategies make big impacts when it comes to figuring out the year’s deductions. Sadly, many small business owners never get the help they need because they’re simply unaware of the many tax deductions available to them. This is where a good, knowledgeable CPA is invaluable. And since you’re hiring your CPA to help you organize and prepare your taxes – he or she becomes a deductible business expense, too. Tons of little-known, obscure strategies will help pull you out of the hole come tax time; it’s just a matter of discovering what they are and how best to take advantage of them. If you want to shave money off what you’ll owe the IRS next year, give these strategies a try. You’ll be surprised at how much of your hard-earned cash you’ll be able to legally keep.

Deduct the Cost of Help

Hire an expert. We’ve already discussed the wisdom behind hiring a professional accountant to help keep your books in record shape, but there are other pros out there who could make your life easier while building up your deductibles, too. Everyone from the copy writer who pens your social media posts to the team who cleans your office are fair game. So long as they’re helping you run your business and you pay them for that purpose, the money you pay them is tax deductible.

Think About Restructuring

Consider restructuring your business model. Are you operating as a sole proprietorship simply because it was the easiest and quickest way to get your business up and running? Another business model might be more tax-friendly. Check with your certified public accountant to find out the pros and cons of the business model you’re currently using, and to see if another structure might be more beneficial.

Track Your AGI

Keep an eye on your adjusted gross income. Your adjusted gross income, or AGI, is your gross income minus all your adjustments. It’s a good idea to monitor this number all year long, simply because once your business exceeds certain numbers in income, certain tax breaks disappear. Know the limits in order to avoid losing valuable deductions that you could have otherwise claimed.

Itemize Office Purchases

Deduct the cost of necessary items. You might be surprised at the list of items that qualify as deductible expenses, depending upon what type of business you own. The old standards qualify; items such as computers, laptops and non-proprietary software. But did you know your office furniture is deductible, too? Office chairs, mats, desks and even smart phones can be deducted from your tax bill so long as they’re used for business purposes. And while you’re itemizing the cost of new office furniture, don’t forget to deduct the cost of business supplies as well. Printer paper, printer ink, electricity and more are all deductible business expenses.

Spend Your Pre-Tax Dollars

Take advantage of pre-tax dollars. Spend company money on business needs such as a new home office remodel or company vehicle. You can use these purchases, or portions of them, as deductions on your tax return. Keeping a home office will let your write off a portion of your monthly mortgage payment. You can do the same with repairs and maintenance for the company car.

Donate Instead of Selling

Declare losses instead of gains. If you sell off those aging store fixtures, you’ll have to declare the paltry amount you make from the sale as taxable income. But if you donate them instead, you can claim them as a loss and take a deduction. The same goes for obsolete office equipment and aging company vehicles. Taking them as losses will benefit you come tax time.

Catch Up on the Bills

Pay January’s bills early. Depending upon your business structure, any funds that remain in your business checking account on December 31 may be fair game for taxation. This is why it makes sense to pay January’s bills before the end of the year. Less taxable income translates to fewer taxes, and you’re taking care of business in the process. This strategy provides tax relief and it sets you up for financial success during the first part of the new year.

Hire Your Children

Put your kids to work. If you hire your own children to help out in the family business, you may be able to deduct their wages. You’ll also save money by not making payments to Social Security and Medicare for anyone under the age of 17.

Open an HSA

Open a Health Savings Account. Different from health insurance, your HSA helps cover expenses that your insurance typically won’t, such as your deductible, your co-pays and any over-the-counter medications your family might need. Money that you invest in an HSA is a deductible expense; one that helps keep you and your family healthy and feeling great.

Allow for Meals and Travel

Deduct meal and travel expenses. If routine travel is necessary part of your business, the expenses you incur are tax-deductible. Mileage, percentages of meals, the costs of lodging and more will help you get a cut on your small business tax bill.

It really does pay to itemize your deductions when you’re a small business owner. The keys are understanding all the possible deductions and remembering to keep receipts and proofs of purchase for every business-related service or item purchased. You must have proof that you bought the merchandise or used the service that you’re claiming.

Timing is important, as well. Knowing exactly when and where to move your money in such a way that it lowers your year-end taxable income is vital. It’s all perfectly legal if you put it in the right places within the allotted time. Consult with your CPA about money movement strategies to reduce small business taxes.

Lastly, learn to use the money you have to your best advantage. It’s better to use it on something like health benefits or retirement than it is to let it linger in your checking account and show as taxable income.

When you’re ready to claim all the deductions that are due you as a small business owner, give us a call. We’ll help you find every strategy for saving money on next year’s return.

A key portion of the new Tax Cuts and Jobs Act (TCJA) is Section 199A and its deduction of qualified business income. Section 199A allows taxpayers other than corporations a deduction of 20 percent of qualified business income that is earned in a qualified trade or business, though this has some limitations. There are both positive and negative aspects to the changes depending on your situation.

Tax Adviser outlines the following crucial points about Section 199A:

• The deduction is limited to the greater of

(1)   50% of the W-2 wages with respect to the trade or business or

(2)   the sum of 25% of the W-2 wages, plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property (generally, tangible property subject to depreciation under Sec. 167). In addition, the deduction also may not exceed (1) taxable income for the year over (2) net capital gain plus aggregate qualified cooperative dividends.

• The deduction does not include the trade or business of performing services as an employee and "specified service" trades or businesses: those involving the performance of services in law, accounting, financial services, and several other enumerated fields, or where the business's principal asset is the reputation or skill of one or more owners or employees.
• Qualified business income is the net amount of qualified items of income, gain, deduction, and loss with respect to a qualified trade or business that are effectively connected with the conduct of a business in the United States.

However, some types of income, including certain investment-related income, reasonable compensation paid to the taxpayer for services to the trade or business, and guaranteed payments, are excluded from qualified business income.

In addition:

• The W-2 wage limitation does not apply to taxpayers with taxable income of less than $157,500 for the year ($315,000 for married filing jointly) and is phased in for taxpayers with taxable income above those thresholds. Income from specified service businesses is not excluded from qualified business income for taxpayers with taxable income under the same threshold amounts.
• The new law also reduces the threshold at which an understatement of tax is substantial for purposes of the accuracy-related penalty under Sec. 6662 for any return claiming the deduction, from the generally applicable lesser of 10% of tax required to be shown on the return or $5,000 before the new law, to 5% of tax required to be shown on the return or $5,000.

Quick Read Buzz notes the following key takeaways about Section 199A and notes that the TCJA places a weightier importance on wages:

1. Wages will become more important, specifically:
2. Proper classification of employees versus independent contractors.
3. Remember, the IRS requires S corporations to pay reasonable compensation to shareholders who provide substantial services. Expect more IRS scrutiny on reasonable compensation; for example, if officers’ compensation decreased from say, $300,000 historically, to $200,000, it may draw IRS scrutiny.  Currently, sole proprietorships and single member LLCs are not subject to reasonable compensation.  This may change upon further issuance of IRS guidance.
4. W-2 wages are wages paid by the business or a separate company set up by the shareholders to pay wages (company paymaster); and, it most likely will include W-2 wages via professional employer organization (PEO) arrangements (in other words, outsourced staffing).
5. Note: It is recommended that the business have a written agreement with the issuer of the W-2 (PEO) that the business will be using the W-2 wages for the section 199A deduction since both firms cannot use them.

Another key point noted by Quick Read Buzz: the 199A deduction is a decrease in taxable income, not a decrease in adjusted gross income. (This shares similarities to the personal exemption that was repealed in 2017.)

As you consider how Section 199A will affect you and your business, keep in mind that this article only highlights some key points of this topic. It does not constitute comprehensive or actionable advice. It is imperitive that you consult with your own legal and tax professionals before taking actions related to the new Section 199A provisions.

With so many possible deductions and credits available to the individual taxpayer it’s no surprise that the possibilities can get easily lost in the shuffle.

This article identifies some of the tax breaks that frequently get overlooked by the individual taxpayer. The points below will help reduce the confusion of what can and cannot be deducted in your 2016 tax returns.

Kiplinger has identified 23 of the most overlooked tax deductions. Included in these 23 are the following key highlights:

• Reinvested Dividends: this is the one that former IRS commissioner Fred Goldberg told Kiplinger millions of taxpayers miss, costing them millions in overpaid taxes. If, like most investors, you have mutual fund dividends automatically reinvested to buy extra shares, remember that each new purchase increases your tax basis in the fund. That, in turn, reduces the taxable capital gain (or increases the tax-saving loss) when you redeem shares.
• Out-of-Pocket Charitable Contributions: It's hard to overlook the big charitable gifts you made during the year. But little things add up, too, and you can write off out-of-pocket costs incurred while doing work for a charity. 
• Student Loan Interest Paid By Mom and Dad: If parents pay back a child's student loans, the IRS treats the transactions as if the money were given to the child, who then paid the debt. So as long as the child is no longer claimed as a dependent, he or she can deduct up to $2,500 of student-loan interest paid by Mom and Dad each year.
• Estate Tax on Income in Respect of a Decedent: This sounds complicated, but it can save you a lot of money if you inherited an IRA from someone whose estate was big enough to be subject to the federal estate tax. Basically, you get an income-tax deduction for the amount of estate tax paid on the IRA assets you received. 
• Refinancing Points: When you buy a house, you get to deduct in one fell swoop the points paid to get your mortgage. When you refinance, though, you have to deduct the points on the new loan over the life of that loan. In the year you pay off the loan—because you sell the house or refinance again—you get to deduct all as-yet-undeducted points. There is an exception to this rule if you refinance a refinanced loan with the same lender.
• American Opportunity Credit: If the credit exceeds your tax, it can trigger a refund. 
• Don’t Unnecessarily Report a State Tax Refund: The refund is taxable (reportable) only to the extent that your deduction of state income taxes the previous year actually saved you money. 

The bullet points above are some of the frequently over-looked deductions and credits identified by Kiplinger. However, for even more helpful resources, see GoBankingRatesfor a list of “50 Tax Write-Offs You Don’t Know About.”

At this point, you should be asking yourself whether you are getting all the deductions and credits you are entitled to. Of course, this is an analysis that should be done in conjunction with an experienced tax professional otherwise you might be leaving “money on the table.”

Income tax reform and President Trump are not exactly my two favorite topics. However, understanding the impact on various income tax deductions and tax credits brought about by President Trump’s attempt to “make things better” vis-à-vis tax reform should not be ignored. One thing is for sure, the impact of Trump’s tax reform will almost certainly be “give and take.”

Although nothing is yet known for certain, some tax deductions and credits may be traded for lower overall rates in the reform plans of the Trump administration and the Republican congressional leadership.

For that reason, taxpayers may want to make the most of them now, recommends tax research and software provider Wolters Kluwer:

“With tax reform on the agenda for 2017, several tax deductions and credits might be sacrificed in order to lower tax rates, so make sure that you claim all of the tax breaks to which you are entitled before they disappear,” said Mark Luscombe, JD, LLM, CPA and principal federal tax analyst for Wolters Kluwer Tax.

Accounting Today has provided a comprehensive list of some of these must-have deductions and credits that Kluwers references. Again, it’s possible that Kluwers is wrong and these deductions and credits will not be “sacrificed” in future tax reform, but it’s always good to err on the safe side.

What follows is an abbreviated listing of the recommended deductions and credits:

Home Office Deduction

A simplified safe-harbor method for this deduction was introduced in 2013 for those who are self-employed and work out of their homes. It is based on the size of home office and is designed to be a simple calculation.

The simplified safe-harbor option saves time compared to the standard home office tax deduction calculation of figuring related expenses and how they are apportioned over the course of the year to a home office.

Home Mortgage Insurance Premium Deduction

It’s one of the more popular deductions that was extended through 2016 with passage of the PATH Act — allowing most homeowners to write off their home mortgage insurance premium as interest paid on a mortgage. 

Medicare Premium Deductions, Self-Employed

Business owners and self-employed taxpayers may deduct health insurance premiums. Those who are old enough to qualify for Medicare and are also business owners or self-employed may deduct premiums paid for Medicare Part B, Part D and supplemental Medicare policies to guard against health care coverage gaps. However, the deduction is not available for anyone who is already covered under their or their spouse’s employer’s health plan.

Child Tax Credit

The maximum child tax credit of $1,000 per child age 17 or younger is now permanent. For taxpayers with nominal tax liability, a portion of the child tax credit may be refundable. However, the amount of the credit may be less, depending on income level.

Child and Dependent Care Credit

This credit may be claimed by eligible taxpayers who paid work-related expenses for the care of a qualifying individual in order for an eligible taxpayer to be able to work or look for employment. It is a percentage of the amount paid to a care provider and depends on a taxpayer’s AGI. A dependent child must be under 13-years-old when care was provided to qualify.

Adoption Credit

The adoption credit was also made permanent in 2013 and it’s the largest nonrefundable tax credit available to individuals. Those claiming the credit on their income taxes must file Form 8839, Qualified Adoption Expenses. Documentation of qualified adoption expenses, including any adoption decree or court order, should be retained with copies of the tax return.

Earned Income Tax Credit

The EITC is a refundable federal tax credit aimed at helping low- and moderate-income workers keep more of their paychecks. It was enacted in 1975 to offset Social Security taxes for those who qualify and as an incentive for more people to join the workforce. When the EITC exceeds the amount of taxes to be paid, it can then generate a tax refund for eligible taxpayers who claim the credit.

The bottom-line is this: no one at this time knows for sure which deductions and credits will be affected by Trump’s tax reform. We recommend that you check with your tax preparer who should have a better perspective on your particular tax situation and can better assess the impact of these issues on your finances.