MONEY MATTERS: Top 6 Corporate Tax Tips
Tax season isn’t exactly the happiest time of the year for most small business owners. Calculating yearly expenses, booking earnings or losses and potentially writing a big check to the IRS can be a bit intimidating for even the most seasoned veterans.
But don’t let that intimidation factor get in the way of a mission-critical operation. Because make no doubt about it, there is plenty at stake for small-business owners during tax season.
At the very top, hiring a professional accountant is a great move. This gets an expert in your corner to handle all the gritty details. It also means you’ll have support from an insider with experience navigating the system. A good accountant pays for itself many times over.
But just because you’ve got an expert on the team doesn’t mean you should hit the bench. Other than pure operating expenses, there is no area that has a bigger impact on the bottom line. So knowing a thing or two about your corporate taxes is only going to make you smarter and a more effective business owner. It might even help you save money somewhere down the line.
On that note, let’s go ahead and take a look at my top 6 corporate tax tips.
Top 6 Corporate Tax Tips
Increase Capital Expenses
Spending money is usually pretty fun, especially when it comes to big-ticket items. That same principal applies to capital spending on the small-business front, where small-business owners make strategic investments in key areas to drives sales and margins. For a manufacturer, that could mean some new equipment in the factory. For a service provider it could be a new office in a swanky building. Either way, taking that step forward and reinvesting in the business is a great way to reduce your tax liability while pumping up your operating strength.
Inventory Write Downs
Small-business owners are naturally optimistic people. But it that optimistic tone has taken the form of a bloated inventory, it could be time to depreciate some of your assets and take a write down. Writing down the value of your inventory increases your cost of goods sold, thereby decreasing your income and tax liability. An inventory write down is a mere flick of the wrist on the balance sheet, but in the real world it’s a great way to put some extra cash in your pocket during tax season.
HSA for Medical Expenses
But many small businesses offer services, lacking the need for large capital investments or the ability to take a write down. So here’s a great tool that both product and service providers can use. It’s an HSA (Health spending account), and it basically creates a tax deduction for medical expenses. Not only is it a great way to reduce your tax liability, contributions limits are robust, with personal maxed at $3,100 and a family at $6,250. And any funds that go unused are rolled into next-year’s fund, enabling you to avoid timing penalties. Overall, the HSA is an awesome tool to reduce the cost of health care.
Salary vs. Distribution
This is a topic that should be very near and dear to the S corp crowd. One of the incentives for taking an S elective on a regular corporation and becoming an S corp (single person corporation) is the tax benefits with its two-tiered compensation structure. That sounds a bit technical but what it boils down to is regular wages are taxed at normal income rates while dividends fall into the capital gains category of 15%. So while you can see there is a clear incentive in boosting dividends and reducing regular wages, the IRS provides guidelines for what it considers “normal” procedure. It’s one of the great advantages of being an S corp, but it’s also one of the highest audit areas with small business owners claiming too much income through dividends. So make sure you’ve got the right mix.
The home office is also another high-audit area for small business owners. That’s because the IRS clearly states that only office space that is exclusively dedicated to business use can be written off. So it keeps a close eye on home-office deductions that look a little too good to be true. The home office can be a nice deduction, but as always it’s important to understand the rules and stay in the lines.
This is a recurring theme here in Money Matters. Maximizing contributions to your tax-deferred retirement accounts is a great way to reduce your taxable income. And small-business owners have incredible resources available to for saving and investing through SEP IRA’s and 401K plans.
The Big Picture
So whether you’re looking to impress your accountant or just make small talk at your next cocktail party, flexing some out-of-industry knowledge is a great way to turn heads. But on a deeper level, building your knowledge of how your corporate tax structure affects the bottom line will only help the bottom line.
MONEY MATTERS is a weekly column on the Retail Minded Blog that is contributed by Michael Vodicka, founder of boutique financial consulting firm the Vodicka Group. MONEY MATTERS is Retail Minded’s way of supporting independent store owners with all their financial concerns, real life needs and everyday issues both in and out of their stores. You can find MONEY MATTERS every Wednesday on RetailMinded.com as well as in each issue of Retail Minded Magazine.