Small business owners are usually too focused on running and growing their companies to think a lot about taxes. But at this time, it’s important to take some time and focus on year-end tax planning.
One thing to particularly be aware of is “tunnel vision” in small business taxes. Minimizing income to reduce taxes might undermine other financial strategies, like gaining access to credit.
“As a small business owner you have a lot of flexibility in your year-end tax planning,” said Patricia D. Hausknost, a City National Bank senior vice president and wealth planner. “But make sure you look at the whole picture. Consider what you want to accomplish over the following year and beyond so you can time your actions to have the biggest impact.”
Take a Holistic View
Start your small business tax planning with an assessment of this year and your projections for next year.
If this year’s income was light but next year looks good, consider accelerating your billing to bring in more before year-end. If it’s the opposite, look for ways to delay income until January.
Don’t forget about your investment portfolio. Have you had gains that you want to offset by taking a loss somewhere else?
Take a similar approach with expenses. For planning purchases, evaluate whether it makes more sense to take your small business tax deductions this year or next.
Hausknost warned small business owners to be cautious about running expenses through their businesses that they wouldn’t be able to deduct if they worked for someone else, especially items such as entertainment, travel and fees for legal and other professional services. Those are the sorts of deductions that might be called into question in a tax audit.
Also, some tax code changes currently in process may affect family limited partnerships and family limited liability companies. If you’re thinking about transferring your business—either by sale to a third party or giving it to your children—consult your attorney and your accountant to determine whether those tax code changes will affect your plans.
If you’re looking for ways to offset income, here are four strategies to consider:
- Tax Credits: If you’re planning home improvements or other purchases anyway, take advantage of incentives for things like solar panels, energy-efficient appliances and window upgrades. To find 2016 federal tax credits, visit ENERGY STAR. To search state and local offers, use this U.S. Department of Energy tool.
- Retirement Contributions: Many people treat April 15 like a deadline, holding their contributions until the last minute. But if you make your retirement contribution earlier, your money has that much more time to grow. Always look at what the market is doing at the moment, but also remember retirement accounts are long-term investments, Hausknost said.
- Defined Benefit and Contribution Plans: If you don’t yet offer your employees a retirement plan, this might be a good time to start. Consult your financial advisor to review various types of plans and how to get started with the one that best suits your employees and company goals.
- Medical Expenses: Have you already reached the limit of what you can deduct for medical expenses this year? Weigh that factor against whether or not you’ve met your insurance deductible and time procedures accordingly.
This article and the strategies discussed should not be deemed as tax advice. This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. City National, as a matter of policy, does not give tax, accounting, regulatory or legal advice. The effectiveness of the strategies presented in this document will depend on the unique characteristics of your situation and on a number of complex factors. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations. You should consult with your other advisers on the tax, accounting and legal implications of any proposed strategies based on your particular circumstances.