Strategic Business Tax Planning: Minimize Liabilities, Maximize Profits

Jazmin Cicotti
Dec 16, 2023
7 min read
Jazmin Cicotti
Certified EA
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What is Business Tax Planning?

Tax planning is the process of using legal strategies to reduce your organization’s federal and state tax liabilities. It’s important to differentiate tax evasion from tax avoidance. Tax evasion is an intentional underpayment of taxes, while tax avoidance is a legal way to reduce or defer a portion of your tax liability. Tax planning falls in the tax avoidance category.

Moreover, many tax planning strategies need to be put into motion before year-end. This makes tax planning popular around the end of the year; however, some businesses elect to tax plan on a quarterly basis, especially if estimated tax payments are necessary.

Strategic tax planning leads the way to financial prosperity and peace of mind. Working together to unlock the benefits of smart tax planning!

What are the Benefits of Tax Planning?

The benefits of tax planning extend beyond reducing your tax bill each year. In fact, businesses that engage in regular tax planning have transparency into upcoming filing obligations. Knowing where you can expect your tax liability to fall in advance can help you save for an upcoming payment. Being blindsided by a large tax bill can result in cash flow issues, which can be avoided with proper business tax planning.

Additionally, tax planning also aids in business growth. By preserving your profitability, your business has more free cash flow to reinvest into the company to continue growth. With the top individual tax rate reaching 37%, this can seriously eat into your profits. Investing in business growth and leveraging new opportunities depends on minimizing your tax liability.

What are Common Tax Planning Strategies?

The business tax planning strategies that work best for your organization can vary between years. This is why it’s best to work with a tax planning expert each year, ensuring you are effectively reducing your upcoming tax liability. Here are a few common tax planning strategies:

Every dollar counts! Delve into deductions and maximize your savings for a brighter financial future.

Claim All Deductions

The IRS requires a business expense to be ordinary and necessary to be deductible on the tax return. Small business owners often commingle business and personal expenses, missing qualifying deductions. By claiming all deductions, you can reduce your taxable income. Some frequently missed business deductions include:

- Advertising and Marketing – Anything that promotes your product or service, such as business cards, billboards, and print ads.

- Insurance – General business, workers' compensation, health, and life insurance may all constitute a business deduction.

- Business Meals – For the 2023 filing season and beyond, business meals revert back down to 50% deductibility. However, meals related to company parties or office-wide events are still 100% deductible.

- Travel – Travel meals, hotels, airfare, dry cleaning, and vehicle rental expenses are fully deductible. The trip must be primarily business related.

Other business deductions, like continuing education and employer retirement plan contributions, are also deductible. Anything that you can directly tie back to your primary business purpose can generate a business deduction.

Revisit Legal Formation

Most small businesses are formed as sole proprietorships or single-member LLCs. This means all income or loss is reported on your individual tax return on Schedule C. Although the simplicity of filing a Schedule C is attractive to many business owners, it might not be the most tax-advantageous business structure as you begin to grow.

Business tax planning evaluates your current legal formation and uncovers if changing business structures is the right move. For example, by switching from a sole proprietorship to an S corporation, you might be able to save on self-employment taxes. Keep in mind that some business structure changes require you to form an entirely new business. Nevertheless, it may be worth the upfront costs to reduce your tax liability in the long run.

Time Income and Expenses

There are two main accounting methods: cash and accrual. Business tax planning evaluates the taxable income differences between these two methods. You may find that one accounting method lowers your taxable income. Keep in mind that taxable income discrepancies between the two methods are simply a timing difference. In the long run, both methods will result in the same taxable income. One may just defer the tax for a year.

The cash method of accounting only picks up income and expenses when cash leaves your account. Accounts receivable and accounts payable balances are cleared out when filing your tax return. On the other hand, the accrual basis of accounting includes income and expenses if the contractual obligation has been satisfied.

Let’s say that you completed a $100,000 contract right before year-end. You invoice the customer before the end of the year, but they don’t pay you until January. Under the accrual method of accounting, the $100,000 would be reported as income, but under the cash basis of accounting, the $100,000 would be picked up as income in the next year. Optimizing the timing of your income and expenses is an effective tax planning strategy.

Implement Accountable Plans

It’s not uncommon for your employees to pay for business expenses out of pocket. From picking up donuts for the office or booking a business flight at the last minute, employees want to be reimbursed for these expenses. Accountable plans are a method used by business owners to document employee reimbursements.

Proper documentation gives your business the ability to claim reimbursements as a tax deduction. In addition, reimbursements are usually done through payroll. Without proper identification of reimbursements from general wages, your business could overpay on payroll taxes, as reimbursements are payroll tax-exempt.

Accountable plans are relatively easy to set up and maintain with the help of an accounting or tax expert. Why not enjoy lower payroll taxes and taxable income, while ensuring everyone is on the same page with documentation requirements?

Purchase Fixed Assets

The industry you operate in dictates your required level of fixed assets. For example, a manufacturing business might have more fixed assets than a computer software company. Nevertheless, purchasing fixed assets opens the door to special tax deductions.

Generally, fixed assets are required to be depreciated over their useful lives, which can range from 3 years for software to 39 years for buildings. However, for tax purposes, business owners can immediately expense the entire amount under special depreciation options. Only assets placed in service during the taxable year qualify.

The first option is Section 179, which can only be used if your business has taxable income. The other option is Bonus Depreciation, which is allowed to be taken even if your business has an operating loss. Both of these special depreciation options have limitations, which is why it’s best to contact a tax expert that can walk you through the specifics.

Talk with a Professional

Another tax planning strategy that countless business owners overlook is talking with a professional. Odds are you didn’t complete extensive education in accounting and tax. This means you might not know all the loopholes in the tax code that can save you money.

Business tax planning with a professional can help you avoid additional penalties and levies in your business while receiving tax planning solutions tailored to your business. Not to mention that you can have greater peace of mind knowing what the upcoming filing season holds. Tax time doesn’t have to be daunting, especially with the right professional working alongside you.

Next Steps

Is your business currently maximizing profits with expert tax planning? If not, now is the time to take control of your profit and find the right solutions to minimize your liability in the next filing season.

Accounting and tax professionals have busy schedules toward the end of the year, making it important to reach out to tax planning experts as soon as possible. To schedule a consultation with one of our business tax planning experts, reach out today.

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