It’s that time of year again where many of us are pulling together all of our items needed for the CPA to prepare our corporate and individual tax returns. Many of my clients had record years last year, so it’s even more important to begin the tax planning process well before year end.
From what many CPAs tell me, there is no longer a tax “season” and accounting and taxes is really a year round process. However, there is a slight lull maybe around the last tax return extension of October 15th. Generally, you probably have a good idea of what your year is going to look like at that time. Between October 15th and year-end might be a good time to get with your CPA and do some tax planning. As a former banker, there is always a balancing act for the business owner to retain a maximum amount of profits in the business for the banker and minimizing taxable income to reduce taxes recommended by the CPA. You have to balance both if you have a significant credit relationship with your bank. You may even have covenants that require you to maintain certain cash flow coverage and debt to worth ratios as conditions of your credit commitments. Your CPA needs to know these as part of your planning.
Please consult your CPA for specific advice, but these items are fairly standard for tax planning in most businesses.
- Most businesses pay taxes on the cash basis of accounting, not accrual. This allows you to pay taxes on revenue that’s collected, not billed and in some cases can reduce your taxable income.
- Section 179 accelerated depreciation allows you to take greater depreciation expense for tax purposes vs the straight line method for book purposes. If you’re planning to buy equipment or a company building this could be beneficial
- Also, if you currently own a building, you may want to talk to your CPA about a cost segregation study. This is done by an engineering firm and allows you to segregate certain costs in the building and take more than normal depreciation based on those specific costs.
- Many businesses are taxed based on subchapter S status, which means the income flows through to your personal return. You can reduce your personal adjusted gross income by maximizing your contributions to retirement accounts, and if you’re above a certain age there are catch up provisions that allow you to make larger than normal contributions.
There are likely more options than just these, so please consult with your CPA who knows your specific situation. We all have busy schedules and sometimes don’t take the appropriate amount of time to plan. I want to encourage all of you to allocate the proper amount of time to this important aspect of business planning.
