As a small business, you’re always looking for ways to maximize the bottom line. But come tax time, it’s best to minimize that income, so you can hold on to more of it. This requires budgeting and planning well before Dec. 31, as you need to have enough money to take advantage of the many tax deductions and credits available to small businesses. And for those businesses worried about the fiscal cliff, it may make sense to do the opposite this year if on the brink of jumping into a higher tax bracket.
VSA Accounting Services, encourages businesses take advantage of those deductions set to expire or change in 2013. Sections 179, which allows businesses to deduct up to a maximum of $139,000 on equipment and software purchased and put into use in 2012, is due to drop to $25,000 in 2013. And bonus depreciation of 50% on equipment purchases over the $560,000 threshold for capital investment writeoffs is to be phased out. “If you have profits and can declare dividends,” notes Scott. “Qualified dividends are still being taxed at 15%, but that’s due to rise next year.” Scott recommends declaring dividends and reducing profits now to take advantage of that lower rate. Another overlooked deduction is for startup costs, up to $10,000 for 2012. This shrinks to $5,000 for 2013. Small businesses can also claim a tax credit for up to 50% of the costs to set up a retirement plan.
The Affordable Care Act (often referred to as ObamaCare) provides tax credits for up to 35 percent of premium costs for certain small businesses starting or continuing to provide health insurance coverage to employees through 2013. In 2014, the maximum credit increases to up to 50 percent. Health savings accounts (HSAs) allow employers and employees to make tax-free contributions to the account for medical expenses. For 2012, the maximum contribution for individual coverage is $3,100 and $6,250 for family coverage (with $1,000 additional catch-up contributions for people age 55 or older). Some state even offer writeoffs for HSAs.
Another way to build goodwill among your employees and reduce your tax liability is by giving bonuses. Gifts or $25 or less are also tax deductible. You can also take a federal deduction if you pay state and local taxes before Dec. 31.
Budgeting is a key part of keeping that financial house in order. “Every small business needs to have a budget,” Tasik points out. “You can’t do any tax planning without money in the bank.” Small businesses should already have a budget in place for next year and be measuring that budget against actuals throughout the year. Jones recommends getting bringing in your CPA twice a year for a “temperature check” to make sure you’re maximizing all the deductions and credits available to your business, particularly those specific to your business’s industry.
It’s not that you won’t have to pay, it’s just a matter of when. “The more you can defer your tax burden, the better financial shape you’ll be in,” explains Cooper. “Especially when you compound that activity year over year.” All that income deferred into January becomes taxable the next year or when you sell your business or retire. “It’s far better to show as little income as possible in any given tax year, as it lowers your business’s tax burden,” advises Tasik.