As we creep closer to a number of the IRS’s yearly tax filing deadlines, it’s time once again for small business owners and the accounting professionals they depend on to check and recheck their records to make sure no mistakes have been made. This year, it’s especially important for small businesses in the US to do so since there were a number of changes to the tax code as a result of the 2017 Tax Cuts and Jobs Act (TCJA). Some of the changes will turn out to produce big savings for small businesses and their owners, while others could result in some unwelcome surprises. Either way, there are always ways that small businesses can make the most of available deductions and rebates, and in some cases, help their employees do so as well. To help, here are seven tax tips for US small businesses in 2019 that will keep them on the right side of the law while minimizing their tax exposure.
Keep Careful Records and Receipts
For small businesses, there is no bit of tax advice more valuable than to keep accurate financial records and copies of all applicable receipts. That’s because the IRS has been known to target small businesses with extra scrutiny and a higher-than-average audit rate. When those audits occur, it will be up to the business to furnish the IRS with ironclad evidence that they’ve paid the appropriate amount of taxes, or risk fines and other penalties. Often, having proper documentation can mean the difference between a smooth, trouble-free experience, and one that could threaten the business’s bottom line.
Make Use of Accountable Plans
For many small businesses, reimbursing employees for expenses incurred during work is part of their cost of doing business. Things like travel, mileage, equipment, and tools are among the most common types of reimbursements, but many small businesses don’t realize that how they keep track of them does make a difference come tax time. The best way to handle it is through the use of accountable plans, which allow the reimbursements to avoid being subject to taxation as income, which avoids any tax withholding issues and saves the employee on their yearly tax bill.
Never Risk Underpayment
The sheer complexity of the US tax code, especially as it pertains to businesses, almost guarantees that business owners will run into situations where it’s not totally clear when, and how much, the tax is due. The only certainty is that underpayment will result in some hefty penalties from the IRS. The best strategy is always to err on the side of overpayment, and to never let remittance deadlines pass without addressing what the business owes. Even arranging an IRS payment plan or taking out a working capital loan is preferable than risking a payment demand with interest from the IRS.
Seek Advantage through Restructuring
As we mentioned earlier, the 2017 TCJA made several changes to the tax code that have created opportunities for small businesses to minimize their company’s exposure. One of the biggest changes was the introduction of a 20% tax deduction on income earned for certain types of pass-through entities – including many small businesses. The key is that the business must be structured as an S corporation, LLC, partnership, or sole proprietorship to qualify for it, so it may make sense for certain types of small businesses to restructure to take advantage of the break. Of course, this is a topic best discussed with a qualified accountant, because the IRS is already casting a wary eye at companies looking to exploit the new deduction.
Maximize Section 179 Deductions
The goal of most small businesses is to grow into a profitable, larger enterprise. The best way to do so is for the business to continually reinvest its profits back into operations in order to scale up. What many don’t realize, however, is that the tax code contains a provision to incentivize that very behavior. Under section 179, small businesses can write off the full cost of qualifying equipment and software purchases within the same tax year the purchase was made. In effect, it allows small business owners to put more money back into their businesses rather than sending it to the IRS and to reap the benefits immediately after the money is spent, instead of taking years of depreciation write-offs.
Donate Surplus or Unsold Inventory
For small businesses that sell physical items, one of the most difficult things to do is to accurately forecast demand and future sales. Since the one thing that is never acceptable is running out of inventory, this usually means overstocking certain items and ending up with a surplus at the end of the year. Depending on what the business has left over, however, it can sometimes be beneficial to donate unsold merchandise to a charitable organization. In this way, businesses can lower their costs by eliminating the need for storage facilities, and achieve some tax savings through additional deductions.
Utilize Captive Insurance
Small businesses of all kinds rely on insurance companies to underwrite policies to cover any liability that results from ordinary day-to-day operations. The problem with that arrangement is that there’s limited upside for the insured. For example, filing a claim will normally end up raising the business’s premiums, and remaining claim-free mean paying monthly premiums with no tangible returns. In certain cases, however, small businesses can opt for a form of self-insurance known as captive insurance. It’s an arrangement whereby the business operates its own risk-sharing and liability fund, with premiums remaining fully tax-deductible. The major advantage is that the premiums stay within the business and profit distributions on investment income are taxed at a lower rate than conventional income streams.
Plan Ahead to Save
Making use of the tips laid out here will go a long way towards saving small businesses money on their taxes without running afoul of the IRS. To achieve the maximum benefit, however, it’s necessary to come up with a tax plan to put in place before each tax year begins. Since tax law can change from year to year, it’s a good idea to revisit the overall plan with a qualified accountant or CPA every year to make sure it’s still providing the best possible tax outcomes. As always, it’s important to realize that no tax advantage is worth taking any chances by skirting the law, so the best advice is, and will always remain to be cautious and careful whenever taxes are involved.
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