Let's face it: Taking a more strategic approach to tax planning is to business what broccoli is to a diet. Everyone can agree that it represents a smart and healthy approach, but in the daily crush to navigate business and life, good intentions too often get brushed aside.
“Many businesses completely overlook deductions they're entitled to or fail to use all the tools at their disposal to reduce tax liability,” says Millwood, N.Y.-based Barbara Weltman, author of J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line.
Alas, sorting through today's byzantine tax codes and transforming the array of rules, regulations, and laws into reality is nothing short of, well, taxing. What's more, recent changes in healthcare laws, marginal tax rates, social security taxes, and limits for business equipment investments have created entirely new challenges and opportunities for SMBs. Ignoring these changes - and overlooking tax planning in general - is a recipe for problems.
“Effective tax planning can save companies thousands of dollars a year,” explains Richard Lindsey, CPA and partner in charge at the public accounting firm of Zevac & Lindsey LLC, in Mobile, Ala. “The ability to plan ahead and understand how business decisions impact the bottom line helps build a more stable and viable business.”
BY THE NUMBERS
Although it's tempting to view tax planning as an isolated event that rolls around every spring, it is best approached as a year-round endeavor. It's vital to spend adequate time with a tax professional well in advance of the April tax deadline. That way, when the time comes to file a tax return, there are no surprises and no overlooked deductions.
There are a number of areas that CPAs and other advisers say SMBs should focus on. One of the biggest opportunities for small businesses, they point out, is Section 179 of the U.S. Tax Code. In 2012 and 2013, it allows a firm to directly expense equipment, furniture, and certain vehicles up to $500,000, along with so-called “bonus depreciation” of 50 percent for deductions in excess of $2 million - as long as the business declares an end-of-year profit. “It can be used in a very strategic way to accelerate tax savings,” Lindsey says.
Another deduction that can pay dividends for some companies revolves around the Affordable Care Act and the Health Care and Education Reconciliation Act of 2010. Beginning in 2010, businesses with fewer than 25 full-time-equivalent employees earning annual wages of less than $50,000 and paying more than 50 percent of employees' health premiums were eligible for a tax credit of up to 35 percent of the cost of premiums through the 2013 tax year. The credit will rise to 50 percent in 2014, and a business can claim this credit for two consecutive years.
Bernard Kamoroff, a Willits, Calif.-based CPA, business consultant, and author of 475 Tax Deductions for Businesses and Self-Employed Individuals, says that it's also not too early to begin planning for 2014, when the full impact of healthcare reform will be felt. “Begin discussing various approaches and options and planning for the changes, including how they impact taxes,” he explains. “Unfortunately, a lot of small businesses will wait until the last minute and many of them will not be in a position to maximize their tax benefits.”
In addition, many small businesses overlook tax breaks related to funding retirement plans, Lindsey says. Although there are no major changes for 2013, SEP-IRAs, Simple 401(k) plans, and conventional 401(k) plans can significantly trim the tax liability for sole proprietors as well as other SMBs. They can defer current income until an individual is in a lower tax bracket but also trigger other benefits related to funding employees. The key, Kamoroff says, is to make a good choice up front. Different types of accounts have different, and sometimes mandatory, funding requirements.
EYE ON SAVINGS
Not surprisingly, a number of other deductions frequently fly under the radar. Travel is one of the more problematic areas, especially if an individual combines a business trip with a personal holiday. While some travelers are too aggressive about claiming business expenses, some shy away from taking any deduction for fear of triggering an audit. Typically, it's wise to deduct a percentage of the trip based on the time spent at a convention or on sales calls. The key, Lindsey says, is to keep supporting documents and receipts. “If you are audited, the IRS isn't necessarily going to believe what you put in your calendar.”
Similarly, travel expenses and mileage often fall through the cracks. Even relatively small sums can add up to significant dollars over time. Unfortunately, “A lot of people hop in the car and in their rush to get where they're going, fail to record the mileage. It's extremely difficult to reconstruct this information later,” Weltman says. The IRS requires a log for all miles claimed as a business deduction. An entry in a notebook or smartphone app should include the date, destination, and exact mileage. The standard rate for 2013 is 56.5 cents per mile.
It's also easy to overlook incidental cash outlays - including tips, tolls, and parking fees - that aren't recorded at the time of transaction. Lindsey says that one of the best ways to deal with this persistent challenge is to use a receipt-scanning app on a mobile device or buy a receipt scanner for a personal computer. The best programs can automatically scan receipts, tag and classify them, and send the images and data to applications like QuickBooks. Those who prefer to store paper receipts should scribble notes on the back so that there's no question about the nature of the transaction.
In the end, Lindsey says it's wise to spend some time with a tax adviser to review your business and how it can best conduct tax planning. A “proactive” approach to taxes can result in significant savings while boosting an organization's ability to forecast and manage cash flow.
“Although most business executives are aware that they need to address tax planning, it's an area that receives too little attention,” Lindsey says. “A lot of money is left on the table because individuals and businesses don't claim all the deductions they are entitled to take.”