Small business tax planning seeks to lower your overall tax bill. This may involve taking advantage of available deductions and credits or optimizing revenue and expenses accordingly.
If your company anticipates its tax rate increasing next year, deferring income into 2023 could make sense.
Defer Income
No matter the tax reform laws, small businesses still have opportunities to defer income. For example, companies selling subscription box or streaming services can defer their revenue until customers begin receiving them; this is known as deferred revenue on company balance sheets; once goods and services have been delivered and performed by the business, deferred revenue will decrease by an amount each month and reported as earned income.
Deferrals help bridge the gap between cash basis accounting and income statements. This allows companies to avoid overstating earnings while mitigating tax liabilities more easily and providing an accurate representation of their financial performance.
Accelerate Income
As Yogi Berra once famously said: it is difficult to predict the future, yet small businesses can implement various tax strategies to reduce their tax liabilities at year-end and beyond.
Businesses using the cash method of accounting may encourage clients to pay outstanding invoices before year end and postpone purchasing new equipment or expense reimbursement until 2022, thus shifting income into this year and possibly into lower tax brackets.
Another strategy is to combine expenses like charitable donations and 529 plan contributions into one year so as to exceed the 2% deduction threshold. All these strategies require advance planning and should be discussed with an experienced tax professional before being implemented.
Donate to a Charity
Charity donations not only contribute to community improvement, they can also increase employee morale and brand image while strengthening customer relationships. When selecting a charity that aligns with your company values and is fiscally responsible, Fusaro-Pizzo suggests opting for local groups rather than national ones.
Donations made to charities may qualify for tax deductions if itemized deductions exceed your standard deduction amount, however you should subtract any benefits received in exchange for making donations in order to maximize the effect of this deduction.
Donor-advised funds and donation bunching are effective strategies for increasing your deduction limit, such as stocks. Donations made under these strategies typically do not exceed their cost basis – consult a financial expert to determine which strategies would work best for your small business.
Use the Cash Method of Accounting
Cash accounting records transactions only when cash actually changes hands, providing an accurate picture of your company’s current financial state but giving only limited insight into income and expenses.
Example: if you use the cash method and receive a lump sum payment from a credit customer, this will appear in your records as income even though you might not yet have enough cash available to cover it. Furthermore, the IRS places limits on who can use this accounting method by setting annual gross receipts limits.
The Tax Cuts and Jobs Act raised this limit to $25 million over three consecutive years; however, special rules may apply depending upon entity structure and revenue volume. Please consult your tax advisor for more details.
Change Your Business Structure
Your choice of business structure for your small business has significant legal and tax ramifications, affecting how much tax is paid, how money is raised, paperwork to file and protection from personal liability.
Modifying your accounting method may help reduce the taxes you owe by deferring income and increasing expenses, or by taking out tax-free loans from your business and deducting bad debt expenses as expenses.
An experienced tax professional can assist in navigating the complexities of tax laws, as well as identify possible tax-saving strategies for your business. Make an appointment to discuss your needs with a CPA in your area now – they’ll stay current on changes to tax laws while ensuring compliance with all relevant legislation.
