Tax time is tough because the paperwork tsunami keeps you from asking the bigger question—what’s the best possible tax move for my business right now? The good news is, there are strategic moves you can make that will earn you a bigger tax return for your small business. And we’ve organized them into this article so you start strategizing right away.
While we can’t cover everything (that’s what your CPA is for) we’ll dive into the basics of year-end tax moves, tax breaks, and smart deductions. Let’s get started.
Classic year-end tax moves
Defer business income until January
The best way to defer income is to delay sending out invoices until January. This sounds counterintuitive—you usually want to invoice customers as soon as possible to boost cash flow. But if you have enough cash on hand to meet your December expenses, you could cut your 2017 tax bill by waiting until January to collect some receivables.
Go on a deductible spending spree
The flip side of this equation is expenses, where you want to do just the opposite: Accelerate deductible expenses into 2017 so you can write them off this year. For example, if you use cash basis accounting you might be able to prepay your January mortgage or rent, as well as 2018 property taxes, insurance premiums, or advertising and interest expenses.
If your business needs new fixed assets and equipment, plan to purchase and place them in service before the end of the year so you can deduct them on your 2017 tax return (up to $510,000). This includes not only heavy equipment used in manufacturing, but also office furniture, computers, and business software. Buying business services in bulk, including online bookkeeping services like Bench, also qualifies.
This strategy is referred to as Section 179 expensing, and involves writing off certain fixed assets now instead of depreciating them over several years.
Recognize bad debt
There is a silver lining to uncollected accounts receivable, or what the IRS calls “bad debt.” If yours is an accrual-based business, you can write off bad debt on your tax return if you took reasonable steps to collect it.
Before the end of the year, determine which of your outstanding accounts receivable are likely not to be collected and recognize these as bad debt. The good news is you can still try to collect them next year — if you do, you’ll simply count the money as revenue on your 2018 tax return. This IRS article has more detailed guidance for claiming bad debt deductions.
Contribute to your employees’ retirement accounts
You can deduct contributions your small business makes to your employees’ qualified retirement accounts, like SIMPLE 401(k)s and IRAs, Simplified Employee Pension (SEP) plans, and profit-sharing plans. The annual contribution limits in 2017 are as follows:
- SIMPLE 401(k)s: $18,000 or $24,000 for employees who are age 50 or over.
- SIMPLE IRAs: $12,500 or $15,500 for employees who are age 50 or over.
- SEPs and profit-sharing plans: $54,000 or 25 percent of compensation, whichever is less.
You actually have until the 2017 tax-filing deadline to make these contributions, or April 17, 2018, for most businesses (not counting extensions). So if your cash flow is tight right now, you can budget these for early next year.
Claim targeted tax breaks
The tax code includes several tax breaks targeted to businesses that perform certain activities. There are three common ones to note.
Domestic Production Activities Deduction (DPAD) credit
Also known as the Section 199 deduction—this credit can be claimed by businesses that perform specific manufacturing activities in the U.S. These include building and construction, film and video production, and architectural and engineering services.
The research and development (or R&D) credit
Lots of small businesses don’t think they’d qualify for this because they’re not involved in technology, but the qualification criteria are actually fairly broad. The IRS has created a four-part test you can use to see if your business qualifies for the credit, which is equal to up to 9.1 percent of eligible research expenses.
The Work Opportunity Tax Credit (or WOTC)
If your business hires members of certain targeted groups, you can claim a tax credit equal to either 25 percent or 40 percent of these employees’ qualified wages, depending on how many hours they work. Veterans, food stamp recipients and ex-felons are some of the WOTC groups identified by the IRS.
Claim every common deduction you can
You’ll also want to claim any other expense deduction your small business is entitled to. Some of the most common ones include:
Business meals and entertainment
You can deduct 50 percent of the cost of food and beverages purchased during business-related meals. It’s important to keep receipts and good records to substantiate these deductions, including the date and location of the meal, the amount spent, and your business relationship with the other party.
Business use of vehicle
If you use a vehicle solely for business purposes, you can deduct the costs involved in operating it on your federal income tax return. Or you can use the standard mileage rate to determine your deduction if you prefer, which is 53.5 cents per mile for tax year 2017.
You can deduct costs incurred during business-related travel away from the city or area where you conduct business. Deductible business travel expenses include travel to and from the destination (such as airfare and cab or Uber fares), tolls, parking fees, lodging and meals, and gratuities.
If you use a specific area of your home regularly and exclusively for business purposes, you may be able to claim the home office deduction. You can use the IRS’ simplified method for calculating the home office deduction, which is a standardized $5 per square foot of the area in your home that’s used exclusively for business (up to 300 square feet). The IRS website has more detailed guidance for claiming the home office deduction.
This is just a sample—you’ll want to check out this exhaustive list of small business deductions to make sure you’ve caught everything.