Tax planning is a process of looking at various tax
options in order to determine when, whether, and how to conduct business and
personal transactions so that taxes are eliminated or considerably reduced.
Many small business owners ignore tax planning, and don’t
even think about their taxes until they’re scheduled to meet with their
accountant; but tax planning is an ongoing process, and good tax advice is a
very valuable commodity. You should review your income and expenses monthly, and
meet with your CPA or tax advisor quarterly to analyze how you can take full
advantage of the provisions, credits and deductions that are legally available
Although tax avoidance planning is legal, tax evasion –
the reduction of tax through deceit, subterfuge, or concealment - is not.
Frequently what sets tax evasion apart from tax avoidance is the IRS’s finding
that there was some fraudulent intent on the part of the business owner. The
following are four of the areas most commonly focused on by IRS examiners as
pointing to possible fraud:
- A failure to report substantial amounts of income, such
as a shareholder’s failure to report dividends, or a store owner’s failure to
report a portion of the daily business receipts.
- A claim for fictitious or improper deductions on a
return, such as a sales representative’s substantial overstatement of travel
expenses, or a taxpayer’s claim of a large deduction for charitable
contributions when no verification exists.
- Accounting irregularities, such as a business’s failure
to keep adequate records, or a discrepancy between amounts reported on a
corporation’s return and amounts reported on its financial statements.
- Improper allocation of income to a related taxpayer who
is in a lower tax bracket, such as where a corporation makes distributions to
the controlling shareholder’s children.
Tax Planning Strategies
There are countless tax planning strategies available to a
small business owner. Some are aimed at the owner’s individual tax situation,
and some at the business itself. But regardless of how simple or how complex a
tax strategy is, it will be based on structuring the strategy to accomplish one
or more of these often overlapping goals:
- Reducing the amount of taxable income
- Lowering your tax rate
- Controlling the time when the tax must be paid
- Claiming any available tax credits
- Controlling the effects of the Alternative Minimum
- Avoiding the most common tax planning mistakes
In order to plan effectively, you’ll need to estimate your personal and business
income for the next few years. This is necessary because many tax planning
strategies will save tax dollars at one income level, but will create a larger
tax bill at other income levels. You will want to avoid having the “right” tax
plan made “wrong” by erroneous income projections. Once you know what your
approximate income will be, you can take the next step: estimating your tax
The effort to come up with crystal-ball estimates may be
difficult and by its nature will be inexact. On the other hand, you should
already be projecting your sales revenues, income, and cash flow for general
business planning purposes. The better your estimates, the better the odds that
your tax planning efforts will succeed.
Hidden within the labyrinthine course known as the
Internal Revenue Code are valuable money-saving strategies overlooked or
undiscovered by many business owners. At the same time there are misleading
passages that have been the cause of millions of dollars mistakenly paid to the
IRS. Dollars that should have remained in business owners pocket.
Alternative Ways to Save on Business Income Taxes
Maximizing Business Entertainment Expenses
Another interesting way to save on your taxes, that can be
fun as well as rewarding to you and your business, is to deduct entertainment
expenses. Entertainment expenses are great deductions to add to your taxes and
can save you money, however there are some important guidelines to consider when
including them on your return.
In order to qualify, business must be discussed before,
during, or after any meal deducted. The surroundings must be conducive to
business discussion. For instance, a small or quiet restaurant would be an ideal
location for a business dinner. Be careful of locations that include ongoing
floorshows or other distracting events that inhibit business discussions. Prime
distractions are theater locations, ski trips, golf courses, sports events, and
Starting in 1994, the IRS allows up to a 50% deduction on
entertainment expenses. Good documentation of these expenses is required in
order for the IRS to consider these deductions. Remember that the business meal
must be arranged with the purpose of conducting specific business. Bon appetite!
Important Business Automobile Deductions
An automobile is quite an expense, especially for those of
you who own more than one. There is a light at the end of the tax tunnel,
though. Recently, the IRS has accepted a new mileage deduction rate. The rates
are 44.5 cents per business mile, 14 cents per charitable mile, and 18 cents per
Another common way to increase deductions is to include
both cars (if you own more than one car) in your deductions. This is possible
since the business miles driven determine business use. To figure business use,
divide the business miles driven by the total miles driven. You can do this for
each car driven for the business and can bring significant deductions.
This is simply a wonderful way to save, but remember: in
order to be effective, a consistent mileage log should be kept. Consider meeting
with a professional to determine the most efficient way of tracking mileage and
other costs. Happy driving!
Increase Your Bottom Line When You Work At Home
The home office deduction is quite possibly one of the
most difficult deductions ever to come around the block. Yet, there are so many
tax advantages it becomes worth the navigational trouble…Here are a few common
tips for home office deductions that can make tax season significantly less
traumatic for those of you with a home office.
Try prominently displaying your home phone number and
address on business cards, have business guests sign a guest log book when they
visit your office, deduct long-distance phone charges, keep a time and work
activity log, retain receipts and paid invoices. Keeping these receipts makes it
so much easier to determine percentages of deductions later on in the year.
The tax laws allows you to immediately expense, rather
than depreciate over time, up to $108,000 worth of business assets that you
purchase during a year. The key is “purchase”…it can be new or used. All home
office depreciable equipment meets the qualification. Also, if you purchase more
than $108,000 in equipment, you can expense the first $108,000 then
depreciate the rest.
Make sure that before you start deducting all of these
items on your return, that you have qualified for the Home Office Deduction. You
should consider meeting with a tax professional for further Home Office