As a small business owner, you often hear about “Tax planning.” To make it simple, tax planning is the practice of analyzing multiple tax options to decide how you want to operate your business as well as your individual transactions to minimize or eliminate your tax liability.
Most small business owners are good at what they do, but overlook the importance of tax planning; or simply dread the process! Most small business owners, especially artists and designers need to focus their energy on their creative process and simply don’t have the time be their tax mindset until it’s already tax season. However, tax planning is not a “set it and forget it” practice; it’s an ongoing process, and high quality tax counsel is a lifesaver! You’ll greatly benefit by analyzing your income and expenses on a monthly basis by a trusted bookkeeper. Then, on a quarterly basis, you’ll be more productive and ready, when meeting with your accountant or tax advisor. Also by doing so, it’ll be much more efficient to assess how you can benefit from legal tax advantages, such as deductions and credits.
The law doesn’t require you to take advantage of tax planning. However, you should be aware that tax evasion is very much illegal! Tax evasion, also known as Tax Fraud, is reducing income through false pretenses. Below are 4 areas the IRS typically focus on to identify possible tax fraud:
- Not reporting significant income. For example, a shareholder not reporting dividends; or a business owner not reporting some or all of its business receipts—selling things under the table.
- Making false claims or inflating travel expenses or charitable deductions, and no record to show for it; or showing a record that’s been falsified.
- Discrepancies between what’s been reported on the business’s return and what’s reported/recorded in financial records. This can happen simply as a result of a business not keeping adequate books.
- “Paying your kids” or someone related to you in order to lower the filer’s tax bracket and thus, avoiding higher taxes.
Simple Strategies for Tax Planning
There are a plenty of tax planning strategies for small businesses owners. Usually, these are targeted at the business or at the owner of the business. The strategy may be simple or it may be complex but it needs to be built around accomplishing one of these objectives:
- Lowering taxable income
- Decreasing tax rate
- Taking control of when the tax needs to be paid
- Taking advantage of eligible tax credits
- Managing the impact of Alternative Minimum Tax
- Preventing typical tax mistakes
To plan well, determine your estimated individual income as well as your business income for the upcoming 3-5 years. Ideally, you should make the appropriate plan, based on accurately projected income. After you’ve identified your estimated income, you can determine your estimated tax bracket.
Accurately projecting your income can be difficult, since what could happen in 3-5 years could be unpredictable—You could wildly get financially successful, which is a good problem to have!!! Despite unpredictability, you’ll still need to forecast your sales, expenses, income, and cash flow for planning to meet the needs of your business. The more accurate your forecasts, the more efficient your tax planning can be.
Turn Travel & Entertainment Expenses Related to Business into Tax Deduction Gold!
Expenses for travel and entertainment related to business are deemed lawful deductions, which reduce your tax owed, thus making you more profitable! However, you need to adhere to specific guidelines laid out by the IRS.
For example, to be eligible for an entertainment expense deduction, you need to discuss business matters at some point during the entertainment. It’s important that the environment is appropriate for discussing business. For example, a quiet restaurant would be ideal, but a loud nightclub not so much!
The IRS entitles you to deduct up to 50% of expenses on entertainment. However, make sure you are maintaining accurate records.
You could also turn your next vacation into tax deduction, by following these 5 steps!
Deductions for Work-related Vehicles
There are deductions to take advantage of, if you’re using your car as transportation to do business. For example, if you’re driving to a meeting with a client, outside of your normal commute, you can deduct a certain amount of mileage.
In 2015, the standard mileage reimbursement rates determined by the IRS are 57.5 cents per business mile, 14 cents per mile when volunteering for a qualifying charity and 23 cents for moving (more than 50 miles from your home and the move is related to your new work) and also 23 cents per mile for medical reasons.
You can also benefit from this tax deduction if you have two cars. The amount of miles driven is determined by business use and not by a specific car—although you have to own the car you’re taking the deduction with. To take this deduction, simply take the total business miles accumulated and divide by the total miles driven.
It’s important to keep accurate records: when, where, the purpose and the date—anything that’s helpful in establishing credibility for the deduction.
Home Office Deductions
Home office/work studio deductions can be a significant reducer of taxable income. For example, if you can legitimately claim $500 per month as a home office deduction, that lowers your taxable income by $6,000. That could potentially put you in a lower tax bracket.
Your home office has to be a space in your home, used exclusively for conducting business. So, it can’t be a bedroom or where you work from the dining room table. Typically, this deduction is meant for people who have a spare bedroom or garage, which they turned into an office or studio. You can take a deduction based on the square feet of your home. If your home is 1000 square feet with a $2000 mortgage, and your home office is 200 square feet, you can deduct $400 per month—a total of $4,800.
Keep in mind that there are some deductions that can be taken even if you don’t qualify for the home office deduction alone.
To guarantee that your tax planning is in good shape and to ensure you meet all of your legal tax obligations email us or contact our Santa Monica & Beverly Hills office.
