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2019 Business Tax Planning

  Sanjiv Gupta CPA  Published 
2019 Business Tax Planning

Hundreds of entrepreneurs hire advisors for strategies and tips on how they can save money. As usual, they will get the common response: Sell the stocks that under-perform in order to harvest losses. Make sure that the individual spent money in flexible spending accounts. 

Truth of the matter is that this strategy is a trap. Business owners must have several money saving strategies at their disposal and they should consider this before the year even ends. Here are the top 10 strategies that can save businesses. 

Make an S-Selection on the LLC that is set up and use this for operations

This election for clients is implement every December in the tax year. If the individual previously paid so much in self-employment tax and also listed his or her business as an LLC (this is a common mistake for planners), then the individual can easily elect being taxed as an S-corporation in the following year. It is affordable, simple and easy to file this kind of right paperwork. There are also new and current IRS regulations that let the retroactive classification be applied toward the end of the year. However, individuals must not forget to do their payroll because it is required to take this out of the company even before an election is made. 

Set the payroll amount.

S-corporation owners or those who are newly elected in LLC S-Corps are expected to complete their payroll even before the year ends. A number of business owners choose to wait until the last quarter to do this. This is not a good approach because the business can be flagged for potential IRS audit. If this is already done for the last quarter throughout the year, then this is the perfect time to adjust the proper amount. It can be increased or lowered, based on the net income. 

Putting kids on payroll 

Surprisingly, this is an under-utilized and overlooked strategy. Paying the individual's children for bona-fide services can also provide his or her business a tax-saving tool that is so powerful and logical. First of all, there is an incredible benefit that the person can pay their children through a single member LLC or sole-proprietorship. If the child is below 18, then the business is also not required to withhold the payroll taxes and FICA. Second, the child can also use his or her standard deduction against any income that is paid. That is the sum that is earned and the income that entails no income tax. However, if there is an S or C corporation, then the Internal Revenue Code also requires that FICA is withhold from all employees on the payroll.

The practical approach is that the business account for these payments have to comply with regulations. For those who doubt this strategy, it is important to remember that "kiddie tax" is not applicable in this very scenario because it is considered passive income. It is also critical to follow proper procedures and create bank accounts devoted for children in order for payments to follow through and for bona-fide services to be documented. Filing, cleaning the office, shredding paper and working toward rental property are all great jobs for children.

Putting spouse on the payroll

Business owners must only consider this strategy if his or her spouse is contributing money to the company's 401(k) for the purposes of tax planning. Otherwise, generating the spouse's earned income and subjecting this to payroll taxes is a careless move. Moreover, this is a non-sensical move in order to get deductions for salaries that end up on joint return in the long run. 

Implement a 401(k) before the end of the year

A properly designed 401(k) is self-directed and also utilized in real estate-transactions, small business investments and hard-money lending. This year, small business owners are allowed to deduct a maximum of $51,000 and even match this. This is $18,000 defer all before matching and an additional $5,500 for entrepreneurs who are 50 and above. However, the payroll level that the individual selects for himself or herself must also be carefully considered during the process. 

The entrepreneur must also start establishing his or her entity ASAP

January 1 is the ideal time to set up a bank account and books. Number of states also impose fees and franchise taxes that make it logical and economical to file the articles in and also around the first of the year. This means the LLC for the new rental property is also getting the title transferred into the S-corporation and LLC because the individual has already paid too much in self-employment tax throughout the year. The individual has to make sure that he or she must not file early in order to create the short-year tax return. Timing is all that matters here.

Close on rental property

Cost segregation is fast growing in tax planning and has also been the strategy that is used by owners of large commercial projects. Cost segregation is essential in the process of reclassifying the assets of the rental property into personal and real property. This also moves the certain assets in accelerated depreciation class. This also allows the property owners to defer tax dollars that can also amount to thousands. This said, it is critical to consider the real estate professional classification and also the passive income that is able to deduct this in segregated depreciation. This can also be written off into a carry-forward status if the individual is not careful.

Purchase vehicles

More than 90% of clients turn to and use what is called the mileage deduction strategy. However, there are businesses that resort to an SUV or large truck so that they could consider purchasing a vehicle that weighs more than 6,000 pounds This current deduction for depreciation can also reach to $25,000 but that is dependent on the cost of the vehicle and the business-use percentage. The congress is also expected to expand the deduction that would amount to $500,000 especially at the last minute. With this increase, the deduction can also very among the SUV, truck with a 6-foot bed or RV. These options are discussed with tax advisor. 

Make a ROTH Conversation

This strategy cannot be explained enough. It is very much important to consider converting the traditional IRA or the 401(k) and turn this to Roth IRA> This also starts paying taxes at lower rates and can also excuse taxes to be paid on withdrawals in the future. Regardless of the income, the individual can also convert many dollars. However, this is also considered tax bracket and can also go for the IRA before switching this over. You can also keep the marginal tax bracket in check. This election must be completed before December 31 and this can also be reversed by April 15. 

Push the income or the expenses to the proper year

This is the usual and standard strategy, but it can be quite tricky especially when the tax rates are high. Typically, income must be pushed to next year and also accelerate the expenses to the current year. However, when income is spread out between the year and the net year, then the individual must maintain higher marginal tax brackets, if not higher. 

Should any of these strategies be considered, it is very important to have decent books, so the individual is informed and equipped with accurate decisions. One of the best year-end strategies can also implement in getting your bookkeeping in starting the year off and also make better economic and management decisions for the business. 

As you can see, there are also various options for small business owners and the unique ones at that. Individuals must also make sure that tax advisors are consulted and cannot be satisfied with standard answers that can simply sell under-performing stocks in order to save taxes. A small entrepreneur can also offer the tax return with so much potential in order to keep taxes and tax men at arm's length. 

Taxes for small businesses are confusing and it is always confusing for some to figure out how much they pay and why they should pay that amount. The important thing to consider is that taxable income must be reduced. 

Finding ways to lower their taxable income can be a legitimate reaction and also avoid pitfalls. These have great returns and can also lower the taxes for small businesses. 

Unfortunately, there are business owners that overpay their taxes by missing certain deductions and managing retirement savings and businesses in a way that is not efficient for all the tax purposes. The US tax code is roughly 70,000 pages that is understandable why business owners and accountants have also trouble in navigating. There are complexities that are dealt with when trying to minimize that tax bills but with right strategies. Individuals can also save money on his or her taxes when making life easier through the year especially during tax season.

Now that has been enumerated, here are ways on how business owners can lower their taxes. 

1. Keeping an eye on Adjusted Gross Income

There are tax breaks, additional taxes and limitations that tee off on AGI or adjusted gross income along with the MAGI or modified adjusted gross income which is similar to the former for most filers. 

2. Use accountable plans

If the business owner reimburses the employees for entertainment, travel, tools and other costs, then consider using a plan that also meets the IRS requirement which is also called an accountable plan. With this plan, the business is then deducted and is not reported as a reimbursement for the employees' income. This also potentially saves the company employment taxes and also lowers the taxable income overall.

Also, if the company does not already offer the accountable plan for employee reimbursement, then the employees will ask for one because as decreed under the current and new tax law, the employees cannot deduct the unreimbursed employee expenses. It also gives the employees a plan for reimbursements that can help the employees that save the money on the taxes along with helping the businesses. This is a win-win for everyone.

3. Make Smart Tax Elections

There are several ways in reducing taxable income by being strategic in business expenditures. For example, it is allowed to deduct the cost of getting equipment and machinery in full and up front to a set dollar amount. 

However, there are businesses that can start up and still be deemed unprofitable. It is important to ask the accountant before these items are depreciated. It can also be better if the overall tax situation spreads the value of the purchases that are made across the future tax years instead of reducing the full price of the purchases at one go. This can also help produce the deductions for future years once these assets are more valuable to you.