Preface: Tax planning is an important and vital step to reducing the cost of business. But saving tax dollars isn’t the only prudent or advised consideration. Strategizing with your tax advisor to manage business costs, and plan tax advantaged operating and investing cash flows, with before and after tax dollars, will reward your business
Small Business Tax Reduction Strategies
Taxes are simply a cost of doing business. Yet, like all costs, you can manage them to your advantage. If you’ve read this far, you are an entrepreneur who appreciates the time it takes to plan the tax effect of your income. Maybe planning tax strategies is new to you. Whether it is or not, the strategies are similar year to year–deferring revenue, accelerating expenses, contributing to a retirement account, making charitable contributions, or maximizing depreciation expense. You would be wise to stick with only legal tax reduction strategies. Any other path is risky, may result in lowered business value, and is time-tested to be morally wrong. Other legal loopholes include domestic productions activities deductions for manufacturers or specific tax credits which apply to your industry.
Employee bonuses are a great strategy to reduce taxes and reinvest in your workforce. A well-compensated team will take satisfaction in their work and lessen hidden business liabilities such as employee inefficiencies. Reducing taxes can be done in many more ways.
Investing in marketing and advertising is another strategy for deferring a business tax liability. Advertising and marketing is one of the most efficient methods to defer taxes from one year to the next, or every year. An advertising campaign will help you develop your market position, and defer revenue to later periods. With the increased top line revenue from advertising, you can increase the value of your business over time, too.
Successful tax planning should line up with the business vision. For instance, does it make financial sense to purchase $150,000 of equipment solely to save on taxes? Will the new equipment reduce costs on manufacturing processes and provide a 7% IRR in the future? Spending cash to purchase necessary equipment such as a truck, robotics, or office furniture, should result in plans for additional future cash flow, such as the development of office staff and plans for office overhead. Otherwise paying the tax at 40% still puts 60% net tax in your bank account for new working capital.
Keep in mind that debt is repaid with income, net of tax, except the interest expense. So if you have a $150,000 line of credit, you will need to earn say $210,000 or more to repay that line of credit, without reducing working capital. Debt is leverage. If you have debt, you are better off to pay tax and resist spending excessively on fixed assets beyond what is required. With the excess cash you can accelerate the payment of debt, reduce business leverage, and increase equity (and value).
Retirement plans also defer taxes. SIMPLE-IRA’s or SEP-IRA’s are an easy way for business owners to contribute towards retirement and save on taxes. SIMPLE-IRA’s permit up to $12,500 to be contributed and SEP-IRA’s up to $53,000 for 2015. The characteristics of the IRA plans may or may not make them fit well with your business tax planning. If you’re interested, talk about it with your CPA or with a retirement advisor to decide what could work best for tax planning in your business.
Sometimes saving on taxes isn’t everything you need to think about. Are you in compliance with Obamacare? Are you in compliance with labor laws? Nondeductible penalties are an expensive way to learn about the crucial area of compliance. Are you selling your business? Businesses are often valued based on cash flow. The more net income, the more tax paid, often the more value at sale for the seller (you). Why? The business valuation is mostly based on cash flow and net income. This is to say the more tax paid (the higher the tax reported income on the tax return) the larger the gain at sale, because of the value multiple of earnings on the businesses net income. Don’t worry. Sometimes there is an advantage to paying tax.
In summary, tax planning is important and vital to reducing the cost of business. But saving tax dollars isn’t the only consideration. Working with a tax advisor who can help you manage your business cash flows, with before and after tax dollars, will reward your business.