Tax planning is the process of looking at various
tax options in order to determine when, whether, and how to conduct
business and personal transactions to reduce or eliminate tax liability.
small business owners ignore tax planning. They don't even think about
their taxes until it's time to meet with their accountants, but tax
planning is an ongoing process and good tax advice is a valuable
commodity. It is to your benefit to review your income and expenses
monthly and meet with your CPA or tax advisor quarterly to analyze how
you can take full advantage of the provisions, credits and deductions
that are legally available to you.
Although tax avoidance planning
is legal, tax evasion - the reduction of tax through deceit,
subterfuge, or concealment - is not. Frequently what sets tax evasion
apart from tax avoidance is the IRS's finding that there was fraudulent
intent on the part of the business owner. The following are four of the
areas most commonly focused on by IRS examiners as pointing to possible
- Failure to report substantial amounts of income such
as a shareholder's failure to report dividends or a store owner's
failure to report a portion of the daily business receipts.
for fictitious or improper deductions on a return such as a sales
representative's substantial overstatement of travel expenses or a
taxpayer's claim of a large deduction for charitable contributions when
no verification exists.
- Accounting irregularities such as a
business's failure to keep adequate records or a discrepancy between
amounts reported on a corporation's return and amounts reported on its
- Improper allocation of income to a related
taxpayer who is in a lower tax bracket such as where a corporation
makes distributions to the controlling shareholder's children.
Tax Planning Strategies
tax planning strategies are available to small business owners. Some
are aimed at the owner's individual tax situation, and some at the
business itself, but regardless of how simple or how complex a tax
strategy is, it will be based on structuring the strategy to accomplish
one or more of these often overlapping goals:
- Reducing the amount of taxable income
- Lowering your tax rate
- Controlling the time when the tax must be paid
- Claiming any available tax credits
- Controlling the effects of the Alternative Minimum Tax
- Avoiding the most common tax planning mistakes
order to plan effectively, you'll need to estimate your personal and
business income for the next few years. This is necessary because many
tax planning strategies will save tax dollars at one income level, but
will create a larger tax bill at other income levels. You will want to
avoid having the "right" tax plan made "wrong" by erroneous income
projections. Once you know what your approximate income will be, you can
take the next step: estimating your tax bracket.
The effort to
come up with crystal-ball estimates may be difficult and by its very
nature will be inexact. On the other hand, you should already be
projecting your sales revenues, income, and cash flow for general
business planning purposes. The better your estimates, the better the
odds that your tax planning efforts will succeed.
Maximizing Business Entertainment Expenses
expenses are legitimate deductions that can lower your tax bill and
save you money, provided you follow certain guidelines.
to qualify as a deduction, business must be discussed before, during, or
after the meal and the surroundings must be conducive to a business
discussion. For instance, a small, quiet restaurant would be an ideal
location for a business dinner. A nightclub would not. Be careful of
locations that include ongoing floor shows or other distracting events
that inhibit business discussions. Prime distractions are theater
locations, ski trips, golf courses, sports events, and hunting trips.
IRS allows up to a 50% deduction on entertainment expenses, but you
must keep good records and the business meal must be arranged with the
purpose of conducting specific business. Bon appetite!
Important Business Automobile Deductions
you use your car for business such as visiting clients or going to
business meetings away from your regular workplace you may be able to
take certain deductions for the cost of operating and maintaining your
vehicle. You can deduct car expenses by taking either the standard
mileage rate or using actual expenses.
The mileage reimbursement
rates for 2012 is 55.5 cents a mile for business, 14 cents for
charitable and 23.5 cents for moving/medical miles. If you own two cars,
another way to increase deductions is to include both cars in your
deductions. This works because business miles driven is determined by
business use. To figure business use, divide the business miles driven
by the total miles driven. This strategy can result in significant
Whichever method you decide to use to take the
deduction, always be sure to keep accurate records such as a mileage log
and receipts. If you need assistance figuring out which method is best
for your business, don’t hesitate to contact us. Happy driving!
Increase Your Bottom Line When You Work At Home
home office deduction is quite possibly one of the most difficult
deductions ever to come around the block. Yet, there are so many tax
advantages it becomes worth the navigational trouble. Here are a few
common tips for home office deductions that can make tax season
significantly less traumatic for those of you with a home office.
prominently displaying your home phone number and address on business
cards, have business guests sign a guest log book when they visit your
office, deduct long-distance phone charges, keep a time and work
activity log, retain receipts and paid invoices. Keeping these receipts
makes it so much easier to determine percentages of deductions later on
in the year.
Section 179 expensing allows you to immediately
deduct, rather than depreciate over time, up to $500,000 ($535,000 for
qualified enterprise zone property), with a cap of $2,000,000, in 2012
worth of qualified business property that you purchase during the year.
The key word is "purchase" and it can be new or used. All home office
depreciable equipment meets the qualification. Also, if you purchase
more than $500,000 in equipment, you can expense the first $500,000 then
depreciate the rest. Unless Congress makes a change, the maximum drops
to $139,000 in 2013.
Some deductions can be taken whether or not
you qualify for the home office deduction itself. Consider meeting with a
tax professional to learn more about home office deductions.
of the tax strategies we have developed over the years are incorporated
in a book authored by one of our principals, entitled Letters From Uncle Jules. You can contact us or order a copy through Lulu Publishing.