There are hundreds—sometimes even thousands—of decisions a business owner must make in any given season. There are the small decisions about office supplies or dress codes, there are bigger decisions about investments in equipment or personnel, and then there are the life-changing decisions about succession planning or mergers. With a never-shrinking list of decisions to be made, responsibilities to uphold and goals to be met, tax planning can sometimes take a backseat or even be left out in the cold, but it’s an important part of strategic business planning.
As is true with other aspects of business ownership, a lack of proactive planning in tax strategies can put your business behind the curve of competitors. If your business hasn’t been focusing on tax planning, there’s no time like the present to start. That’s why we have identified five key areas where you can make a big impact for your business’s tax planning.
Tax Planning Consideration #1 for Business Owners: Review of accounting method
Are you paying tax on billed earnings where you haven’t collected cash? Are you eligible to become a cash-basis taxpayer wherein you pay tax only on income actually received? The Tax Cuts and Jobs Act (TCJA) opened the door to a great number of businesses to be eligible to use the cash method of accounting as opposed to the accrual method of accounting. If your business averages less than $25 million in gross receipts over a three-year period, you are likely eligible to convert your tax method from accrual to cash-basis. This amount is newly raised from the previous threshold of $5 million in gross receipts. Evaluating your method of accounting may provide opportunities to switch and save.
Tax Planning Consideration #2 for Business Owners: Strategic planning of capital purchases
Have you been putting off replacing a piece of equipment, like a computer, an equipment truck or an HVAC system? Review of accelerated depreciation available through Section 179 and bonus depreciation can help you lower your tax bill while also meeting business needs. A read-through of the tax regulations for depreciation can be a real snooze-fest, but don’t sleep on these opportunities! There are additional means to get an immediate write-off of smaller purchases by making a simple de minimis election in which purchases less than $2,500 (or in the right circumstances, as much as $5,000) each can be directly expensed. If you aren’t looking to make any purchases in the near future, you can still create tax savings through depreciation by having a cost segregation study performed on existing buildings.
Tax Planning Consideration #3 for Business Owners: Interim planning and quarterly estimates
Periodic review of actual and projected income can help you better understand and shift your tax position. Also, paying taxes quarterly can help you to avoid penalties and better manage cash flow. If income from flow-through entities (partnerships and S corporations) is expected to be higher in the current year, paying only the safe harbor amount in estimates can allow you to keep cash for your business without incurring underpayment penalties. Inversely, if income is expected to go down, recalculating tax payments to more accurately reflect actual income can lower your tax payments and, again, keep more cash in your pocket.
Tax Planning Consideration #4 for Business Owners: Tax Credits
Tax credits are sometimes the most under-utilized savings path for business owners. A tax credit is a dollar-for-dollar reduction of your tax bill, as opposed to a tax deduction, which lowers your taxable income amount on which your tax is then calculated. Hiring practices, entrepreneurial discovery efforts, going green and other expenses you may already be incurring could make you eligible for tax credits. Identifying and navigating the requirements to become eligible for these credits can seem overwhelming, but the end result can be more than worth the effort.
Tax Planning Consideration #5 for Business Owners: Succession planning
Succession planning can be a difficult topic to approach, but it’s an important one to prioritize. No one wants to consider the possibility of any situation in which an immediate transfer of a business would be necessary. While there should indeed be planning for those kinds of transitions, succession planning is also much more than that; it encompasses everything from retirement contributions to creating an exit strategy to planning your estate. Failure to adequately plan for these things can mean that your hard-earned dollars have to be used to pay unnecessary taxes. Careful consideration of any number of potential exit strategies is an investment of time that will always pay future dividends. It is never too early in the life of a business to begin thinking about how you want your business to exist or wind down successfully when you are no longer at the helm of it.
So What Now?
These five tax planning considerations are just a small peek into the tax savings opportunities that are available to business owners. The requirement to pay taxes is still a life certainty, but the ability to maximize tax savings can help you as a business owner with the right tools and planning.
It’s important to note that the landscape in which you operate your business will only continue to become more complex—not less. Quite possibly the most valuable tool in your arsenal is the right team of advisors who are continually evaluating your unique situational landscape to keep you in the most advantageous tax position both now and in the future. To learn about your company’s specific tax positions and what tax savings opportunities may be available to your business through proactive tax planning, request contact from a Warren Averett advisor who can help.
Katye Coats is a Tax Manager at Warren Averett who provides tax compliance and consulting services for businesses. Contact her directly at Katye.Coats@warrenaverett.com.