Tax planning involves implementing various strategies that ultimately minimize the amount of taxes your business pays. It reduces tax liabilities by identifying and taking advantage of all legal credits, exemptions, deductions, and allowances. Tax planning is essential for several reasons. Other than lowering your tax burden, it reduces conflict with local, state, and federal tax authorities.
It also gives you greater control over when taxes are paid, as well as improving overall productivity. Tax planning requires regular updates due to ever-evolving tax laws. Let’s discuss some of its most efficient techniques.
Consider Changing Entity Type
As your business grows, you might have to change its entity type to make it more tax efficient and give you liability protection as the owner. The Tax Foundation estimates that pass-through businesses account for more than 90% of all commercial entities. The Tax Cuts and Jobs Act (TCJA) of 2017 made crucial changes to the tax code. Some of its benefits to small businesses are:
- A lower corporate tax rate of 21%, down from a previous high of 39.6%
- On top of business expense deductions, you can enjoy 20% off from your qualified business income. Your taxable income in 2021 must be below $164,900 if you’re a single filer and $329,800 for joint filers. Eligible entities include sole proprietorships, partnerships, LLCs, and S corporations.
- Higher write-off levels for purchasing business equipment, Section 179 deductions include depreciation on building improvements such as security systems, alarms, and HVAC units.
While states have varying procedures for statutory conversions, they follow some general steps. The first is presenting a plan to the company’s partners, the board of directors, and other relevant stakeholders. Once they approve, you can fill your desired entity’s formation documents at the state level. You’ll probably need a new Employer ID Number (EIN).
You can update your federal tax entity classification by filing Form 8832. Most states also require you to inform your vendors, customers, advisors, and local authorities of the changes. Before opting for an entity conversion, ensure the potential tax savings are worth it.
Be Aware of New Changes
The Paycheck Protection Program (PPP) helps your business stay afloat during the COVID-19 pandemic. Your business can apply for this loan to fund payroll costs, as well as cover expenses such as mortgage interest, worker protection, utilities, and rent. The Small Business Administration (SBA) may forgive the loan if you meet their employee retention criteria and use the funds as stipulated.
Although the IRS won’t count your forgiven PPP loan as taxable income, the expenses you paid using the funds won’t be deductible. Consult with a tax professional to get the most out of this coronavirus relief package. The CARES Act also offers various tax breaks to encourage you to keep your workers employed during the pandemic. They include:
- Expanded deductions on charitable donations
- Delayed payroll tax payments
- Net operating loss (NOL) carrybacks
- The suspension of business loss deduction cap
Contribute to a Retirement Account
Offering your employees retirement plans is beneficial to both them and your business. The costs of setting up a SEP IRA, 401(k), or Simple IRA are deductible from your company’s tax return. Contributions to these plans are also deductible. As the owner, you stand to benefit from a tax perspective.
You’ll shelter more of your income since such contributions are usually higher than individual employee retirement accounts. Employees can also reduce their annual income tax by deferring higher portions of their wages. Organizations that offer retirement plans attract and retain skilled employees for longer.
Take Care of Payroll Early
The IRS conducts heavy scrutiny of payroll activities. Other than filing the proper returns, you’re required to offer W-2 and 1099 reports to your employees and temporary hires, respectively. These documents should indicate their wages and how much you’ll withhold. Your tasks include accurately paying state and federal taxes and maintaining the appropriate records. Unless your payroll tax is under $1000, you’re required to file Form 941 every quarter.
This document reports the wages paid, including Medicare, social security, income, and other taxes owed. Ensure you submit it within a month of the end of every quarter to avoid IRS penalties. The agency can either offer you a semi-weekly or monthly payroll tax deposit schedule. For the former, you must make the deposit every Wednesday or Friday after payday. Submit monthly deposits by the 15th of the next month.
Seek Professional Assistance
Tax planning isn’t as complicated as it sounds. The right strategies can realize significant long-term cost savings. The best option is to consult an expert in the field. Some CPAs also double as investment advisers. Other professionals include certified financial planners, chartered financial analysts, and enrolled agents. Identify the one most suited to your specialty, submit all the relevant information, and enjoy the benefits of their expertise.