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 to you.
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 Tax
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 bracket.
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 floor shows or other distracting events that inhibit business
discussions. Prime distractions are theater locations, ski trips, golf
courses, sports events, and hunting trips.
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. The mileage reimbursement rates for 2010 are 50
cents for business, 14 cents for charitable and 16.5 cents for
moving/medical miles. For 2009, the mileage reimbursements rates were
55 cents per business mile, 14 cents per charitable mile, and 24 cents
per moving/medical mile.
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.
Section 179 deduction allow you to immediately expense, rather than
depreciate over time, up to $250,000, with a cap of $800,000, in 2010
worth of qualified business property that you purchase during the 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 $250,000 in equipment, you can expense the first $250,000 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 Deduction advice.
