Small business tax-planning is a task that doesn't necessarily inspire delight. If you're trying to make sure your operation keeps as much of its hard-earned money as possible, though, it's wise to give the issue a decent amount of your attention. Even if you hire a small business tax-planning services firm to assist you, there are still four things that deserve your direct involvement.
1. How and Whether to Incorporate
Incorporating a business changes the way an enterprise is taxed. Foremost, it makes income from the operation subject to the corporate tax rate rather than to the personal one. The current corporate tax rate in the U.S. is a flat 21%.
Notably, the last round of American tax reform changed the way business income reported on personal taxes is handled. In addition to the existing home office deduction, self-employed people and those with pass-through businesses can now deduct a baseline of 20% of their business income before anything comes out.
2. Conduct an Annual Review
Especially after the recent round of tax reform, it's prudent for small business owners to conduct annual reviews to see how certain approaches are working. Also, it's a good idea to consider how changes to your business may influence your tax bill. Over time, you may add or subtract employees, take on equipment, and even forget about items that can be expensed. Conducting an annual review will ensure that you're keeping your tax filings as up-to-date as possible.
3. Understand the Implications of Accounting Methods
There are two kinds of accounting techniques that are commonly used on tax forms: accrual and cash-basis. In an accrual model, you're allowed to carry costs over to later years. With the cash-basis model, you're simply reporting every year as it comes and closing the books permanently once your taxes are filed.
If you're in a business where losses can be big one year and small the next, it may be advantageous to carry some of those losses forward to minimize your tax bills over several years. Folks often use the cash-basis method because it's simpler, but it generally yields the best results for businesses that are in the black every year.
4. Receipt for Everything
Given how many things can be expensed, it can't be emphasized strongly enough how important it is to always track receipts. While most people expense big items, such as heavy equipment, it's easy to overlook things like gloves, paper, pens, and other small items.