As a small business owner, you want to ensure you pay as little as possible come tax filing season. Here are a handful of strategy tips that could help you to minimize your tax liability so you can improve your bottom line..
1. Set up a 401(k) Plan
If you set up your 401(k) plan correctly, you can utilize it to do all sorts of useful things. It could be used in small business investments, hard-money lending, and real estate transactions. The IRS periodically increases the amount you can deduct as a small business owner with matching, so be sure to check current limitations, but they tend to be quite substantial! If you are 50 years of age or older, you can deduct even more by making catch-up contributions. When setting this up, give consideration to the payroll level you select for yourself, as it will affect your limitations and deductions.
2. Convert Your Existing Traditional IRA or 401(k) Into a Roth IRA
This is a strategy that could potentially save you a tremendous amount in tax liability if done correctly. If you have a traditional IRA or 401(k), you can convert it into a Roth IRA to begin paying taxes at a greatly reduced rate, without having to pay taxes on future withdrawals in retirement. This strategy allows you to convert as much of the account’s value as you want, regardless of your income level.
Be sure to give adequate consideration to your tax bracket and the total value of your IRA before making this conversion. It is important to keep your marginal tax rate as low as possible to minimize tax liability. If you make this conversion before the end of the year, you can still reverse the decision as long as you do so by the April 15th filing deadline. If after you do the conversion, you decide it wasn’t the best option for your situation, you can still back out as long as you do so by the deadline.
3. Shift Income and Expenses to the Ideal Year
It is a common strategy to shift income or expenses in order to adjust tax liability for the given tax year. For example, you could move purchases up in order to claim them as deductions on this year’s tax return, or you could delay payments from customers until after the new year to shift them over to next year’s taxes. This is usually the best strategy, shifting expenses to this year while delaying income to next year. There are, of course, exceptions to the general rule. For instance, if shifting things around would put you into a marginal tax bracket that is higher than your current one, then it would probably not be smart to do so.
4. Consider Purchasing a Vehicle if Applicable
An estimated 90 percent of businesses filing taxes use the mileage deduction strategy as their approach to claiming vehicular tax deductions. However, if your business is already using large trucks or SUVs for anything, you might consider upsizing to a vehicle that weighs in at over 6,000 pounds. This could be an option if your business uses utility trucks, delivery vans, or other large vehicles.
The reason for this consideration is that the deduction for depreciation on large vehicles in this weight class can be quite high. For vehicles put into use in 2018 that weigh between 6,000 and 14,000 pounds fully loaded, 100% of the cost can be expensed using bonus depreciation. This will depend on the actual cost of the vehicle and how much of its usage is business specific. If it is used entirely for your business, this deduction could be quite substantial.
If your vehicles do not weigh over 6,000 pounds fully loaded, you can still get substantial depreciation deductions for them. The maximum first year depreciation rate for a new or used car is $10,000 plus an addition up to $8,000 in bonus depreciation, if used entirely for your business.
Also worthy of note here is that you cannot deduct depreciation in this category for dump trucks or other large “equipment” classed vehicles. The deductions are for vehicles business owners or employees actually drive on the road during normal business operations. You also cannot deduct vehicles used for hire, such as taxi cabs or shuttle vans.
5. Set Up and Maintain Excellent Quality Bookkeeping
Detailed, accurate bookkeeping is vital to any tax strategy, and you should take steps to ensure your bookkeeping is set up correctly and remains up to date and accurate. At the beginning of each year, make sure to get your bookkeeping system set up correctly and ready for the upcoming year.
Bookkeeping software has come a long way in recent years, and if you aren’t already using some of the best software on the market, now would be a great time to begin doing so. Software like QuickBooks can make your life dramatically easier and help you not only keep organized books, but also simplify your day to day operations and ease filing when tax season rolls around.
To ensure your tax strategy is above board and follows the letter of the law, be sure to work with a qualified tax preparation or advisory professional who can answer your questions and give tailored advice specific to your business.