If you’re like most small-business owners, this is the time of year when you’re grumbling about taxes. I get it. We all do. But this is also the time of year when you should be doing something about it.
Your tax bill - be it federal, state or local - likely amounts to the highest of all of your annual expenses. That’s why you should be taking actions throughout the year to minimize it.
How? Here are a few things you can be doing right now to minimize your tax bill for 2019.
The tax code allows most small businesses to invest as much as $1 million in capital property - which includes machinery, certain business vehicles, computers, off-the-shelf software, furniture and other property used in a business - and be able to write it off as a deduction in the year it was purchased.
And here’s a trick: You don’t even need to pay for all of it. You can finance all or a portion of these purchases and as long as you put the property into service by year end you can take the full deduction that year. Now’s the time to make these investments, particularly as interest rates are still relatively low.
One of the biggest changes that came about as a result of 2017′s tax reform was the doubling of the individual standard deduction from $6,000 a year to $12,000. Not only does that mean that fewer Americans needed to itemize their deductions this year, but that more business owners could take advantage of the tax benefits of hiring their children.
Please, don’t put your 6-year-old behind the phones. But if you have a child that’s about 12 or older, you can put him or her to work, and if you pay up to $12,000 you’ll not only get a deduction for your business, but also - assuming that your child has no other sources of income - no taxes will be owed.
It’s a great opportunity to spend some time together while your child gets some work experience. Just make sure their paycheck goes straight to a savings account.
Speaking of savings, one of the best ways to save on taxes throughout the year is to continuously be contributing to your retirement accounts. The 2017 tax reform legislation now offers a $500 credit for three years to businesses with less than 100 employees who start up a 401(k) account for their businesses, and the more your employees contribute the more you can contribute - all while reducing your taxable income. Or you may want to consider other pre-tax retirement options, such as a Simplified Employee Pension Plan or a standard IRA.
New changes to 529 plans also allow for you and your employees to save your after-tax earnings that will grow tax free if they are ultimately withdrawn and used for higher education, private or religious schools.
This time of year is also a great time to do some spring cleaning ... in your business.
The IRS will not allow you to take a deduction for uncollectible receivables, obsolete inventory, or unused equipment - and I know you’ve got these - unless they’re removed from your place of business and formally disposed of. So comb through your accounts receivable listing and - I know it’s frustrating - write off those invoices that have been on your books for six months or more. Get rid of that old stuff lying around - it’s just taking up space and costing you overhead. You might as well absorb the loss, and get a tax break to ease your pain.
Finding and keeping employees nowadays is tough. But there are some tax-friendly moves your business can make this year that will not only improve the benefits your company offers, but also help with employee retention.
For example, you can start a new program that reimburses employees for their educational expenses or helps them pay down their student loans. You can offer to reimburse a portion of their adoption expenses. You can offer dependent-care benefits.
All of these outlays could be potentially deductible and most of these benefits – with certain caps and a few exceptions – would not be taxable to your employees. You can also apply for the work opportunity tax credit, a program that gives you a credit against your taxes owed just by hiring someone who is defined as long-term unemployed. Or - if you have more than 50 employees and are subject to the Family and Medical Leave Act - you can pay more than 50 percent of an employee’s salary while the person is on leave and also earn a tax credit back for the effort.
The research and development tax credit is oftentimes overlooked by small businesses because they think that it’s something just for big companies or firms in the scientific world. That’s not the case. The credit - which has been expanded and simplified over the last few years - can be used by any business that is involved in research activities, which includes developing new products, sending samples, or even testing materials and services.
The calculation is complicated and involves considering all costs - both internal and external - plus overheads. But if your company conducts these kinds of activities, you could be saving big on your taxes this year by taking advantage of this potentially enormous benefit.