The beginning of the year always brings the need for business planning and small business owners should also focus on sound tax strategies. The last thing you want to do is miss out on tax deductions that could lead to more money in your bank account.
Available strategies can save time and money and because President Trump said comprehensive tax reform is a priority for the new administration, there are opportunities to plan ahead.
1. Get Organized – Now!
Many small businesses owners do their own accounting instead of hiring a bookkeeper. As a result, it is easy to let organization fall through the cracks. Compile all the documents you receive throughout the year: bank statements, credit card statements, invoices, and form 1099's, as an example.
Being organized lets you track your expenses better. The IRS allows you to deduct your business expenses that are ordinary and necessary. The IRS also requires you to keep track of those expenses and document receipts. If you use an accountant, CPA, or enrolled agent, ask what he or she can do to help you start organizing. They may be able to provide you with an organizing worksheet for your expenses.
2. Give to Charity and Get a Tax Deduction
You can take a tax deduction for items and cash you donate to IRS approved charities. You can confirm if the charitable organization is IRS approved by searching the IRS website. If you donate cash, make sure you keep the receipts you receive from the charity in the event the IRS asks for them. You can also donate items like clothing, household goods, furniture, stocks and even a car. Your deduction is limited to the fair market value of the items and they must be in good condition in order to be deductible. If the non-cash items have a value greater than $500, you have to file a separate form.
3. Use Your Home Office Deduction
Many small businesses work remotely and in many cases, from home. You may be able to take the home office deduction on your tax return this year. The home office deduction is important, because it allows you to take a deduction for the space you use in your home for your small business’s office.
Before you rush to take the deduction, however, there are a few IRS requirements you need to meet to be eligible for the deduction.
a. Regular and Exclusive Use – According to the IRS, you must regularly use part of your home exclusively for conducting business.
b. Principal Place of Business – You must show that your home is your principal place of business. In other words, you must conduct business in your home.
To determine the deduction, you can either use the simple formula or the regular formula. The simplified method makes it easier for small business owners to calculate and allocate expenses for the deduction. Consult your tax professional to discuss the best method to use for your business.
4. Maximize Your Retirement Plans
Start planning your retirement contributions now. You can generally deduct contributions to your retirement plans from your income which reduces your taxes. There are several options for retirement plans and each plan has its own pros and cons. Here are several options:
a. Simple IRA
b. Simplified Employee Pension (SEP IRA)
c. Defined Benefit Plan
d. Solo 401(k)
e. Consult your financial advisors to determine the best fit for your situation.
5. Major Purchases? Take the Section 179 Depreciation deduction
The IRS allows you to take a tax deduction for the complete cost of certain purchases you made throughout the year instead of depreciating it over the useful life of the property. There are certain limitations and requirements that you have to meet in order to eligible for the deduction. The deduction limit can be as high as $500,000 in one year, so it’s worth investigating.
For example, you may want to purchase equipment for your T-shirt printing business that has a value of $300,000 and useful life of 10 years. Using Section 179, you can deduct the full amount of $300,000 for the year you purchased the equipment. Without Section 179, you could only deduct $30,000 every year for 10 years. That is a huge tax deduction – so plan to make large purchases this year.
One more thing: In addition to these planning tips, the Trump administration is focused on cutting income tax rates across the board, which can potentially help small businesses. With the extra money you may potentially save, you can invest more into growing and expanding your business.
About Ebong Eka
Ebong Eka is no stranger to the world of personal finance. As a certified public accountant and former professional basketball player he offers a fresh perspective to small business planning and executing. With over fifteen years of accounting, tax & small business experience with firms like PricewaterhouseCoopers, Deloitte & Touche and CohnReznick, Ebong provides practical money solutions tailored to the everyday person, the aspiring entrepreneur or the small business owner.
Ebong is the founder of EKAnomics, a sales, pricing and leadership firm. He is also the founder of Ericorp Consulting, Inc., a tax and management consulting firm. Ebong is the author of “Start Me Up! The-No-Business-Plan, Business Plan.”