Whether or not there will be tax reform this year becomes less of a certainty with each passing day. One thing we know for sure is that taxes will increase and decrease many times throughout our lifetime. Adapting to the ups and downs of taxes can be a challenge (and a headache) for many small business owners. However, there are multiple steps your tax-saving strategist can put in place to ensure that your business maximizes the lower tax years while protecting business during the higher tax years, too.
While tax increases can be stressful, the most important thing small business owners can do is strategize and plan alongside their tax strategist. The following proactive steps can help small business owners protect themselves against the coming (and future) tax increases:
1. Accelerate income into the current year and defer expenses into the following year.
Looking ahead at current proposals and future tax rates is crucial for maximizing your tax savings. While it sometimes makes sense to upfront large expenses, it may be more advantageous to take the gains if you know proposals will increase taxes for the following year.
For example, if your income is over $1 million, your long-term capital gains rate will go from 20% to 39.6% under the current proposals. Taking gains this year could significantly reduce the overall tax burden from the sale. The current top rate on ordinary income is 37%, but under current proposals, it could rise to 39.6%. Recognizing income under this current rate would be more advantageous, as would deferring expenses like equipment purchases into a year in which higher tax rates are expected.
Staying on top of tax laws and upcoming proposals can be critical to saving and protecting your business. Be sure to use a tax strategist who is looking ahead instead of just your current tax situation.
2. Maximize opportunities to convert personal expenses into business expenses
The difference between an expenditure being personal versus business often involves additional planning and documentation. We recommend working closely with your tax saving professional to go over all of your expenses — even those you deem personal instead of business — to see if there is any way you can maximize them. Some commonly overlooked expenses for small businesses include:
- Home office necessities, which can include portions of your home internet, mortgage, and other utility bills;
- Phone bills, as long as your phone is primarily used for business;
- Personal vehicle mileage and expenses, when used for business ventures;
- and traveling
Proper documentation and planning ahead are crucial for maximizing your personal and business expenses. Our Tax Saving Calculator can also help you assess potential tax savings to get your business expenses to better work for you. Working with your tax professional to convert your personal expenses into business expenses is a great way to help counteract future years of increased taxes.
3. Defer income into long-term retirement planning
A tax-deferred retirement plan is, in many ways, similar to taking on a “partner” in a business venture where you to put up all the money, and take on all the risk and, at some point in the future, your partner (the IRS) is going to tell you what their share is. The IRS will want their share of both the original investment and all of the growth in the intervening years.
If you know your taxes are going to increase in the coming years, an important question to ask yourself, and your tax professional, is: Does it make sense to defer extra income into a long-term retirement plan during a period when the tax rates are expected to be higher?
Every business will have its pro and con list for this decision, but remember that this income deferment does not have to be a long-term decision and can change as new proposals are released. Deferring your income to retirement could allow you to maximize every cent of your income while saving big on your taxes.
4. Do not let taxes be the only consideration
For many individuals, taxes are their largest single expense making them extremely important in future planning. However, spending money for the sake of writing it off can often lead business owners down a long trail of dismay. You do not want to go broke paying taxes, and you certainly do not want to go broke trying to avoid them either. We highly recommend working with a knowledgeable tax advisor and strategist to help you take on taxes with confidence, knowing that you will save big without stressing over your next write-off.
Bottom line: Tax changes are inevitable but future planning with your tax strategist can help ensure that you are prepared for any increases while maximizing the decreases as well.
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