13 Strategies for Minimizing Your Tax LiabilityApril 8, 2019 April 1, 2019 /
Tax planning is a key strategy for businesses and individuals to minimize their tax liability.
For around thirty years, we had no significant changes to the federal tax code, but that has changed with the new Tax Cuts and Jobs Act in effect from January 1, 2018. This means that there may be some changes for how you minimize tax liability compared to what you were doing previously, and your tax return may look different than what you expect.
Here we’d like to offer a few basic strategies that businesses can use to minimize tax liability. Of course, these are general suggestions – we always advise that every business should go through tax planning specific to them with a qualified professional.
#1. Stock up to reduce your income tax liability
This is an old strategy which still mostly holds true under the new tax law (check with your CPA about your business specifically). If you need to reduce taxable income, particularly near the end of the year, you can look around to see what supplies you may be able to stock up on.
For example, office supplies or supplies you need to run your factory or warehouse can be bought ahead so that you receive the deduction for them this year. The aim is to increase business expenses in order to decrease your tax liability.
In the same way, you may be able to pre-pay some expenses to bring your taxable income down. For example, look at fixed expenses such as insurances, building rent or mortgage payments, or any subscriptions your business may have (for example, professional organizations, software, journals…)
#2. Set up and administer a workplace 401k retirement plan
There are a few tax benefits of 401k plans, for businesses large and small. The key is that it makes more sense if your business will be profitable this year and has extra cash that will be taxable.
Here are some ways you can minimize taxes through 401k plans:
- You can deduct the amounts that you set aside for employees and for yourself (with some limits in place). These are considered to be a business expense. This is true for businesses of all types, from Sole Proprietorships to C Corporations.
- You can claim a tax credit for the costs of setting up and administering a 401k. This credit is worth up to $500 per year for the first three years of the 401k.
#3. Write off bad debts for the tax year
Bad debts are any of those that can be referred to as “uncollectible.” Generally this means that you have made repeated attempts to collect on the invoice and the client has stopped responding or has made no further payments.
You’re able to write off bad debts to save on taxes, but this should be undertaken with care. If you write off a debt too early only to have it paid later, you will have to reverse the write-off and declare the payment as income.
A write-off generally works by running a report of aging accounts from your “accounts receivable” account. Where the customer is no longer active with you, it is possible to write these accounts off by crediting accounts receivable and debiting a “bad debts” account. You may also need to separately reverse any sales taxes that were charged on the original invoice.
#4. Reduce your tax bill by writing off obsolete equipment
You should have a list of all equipment, including that which is used in the office for your company. You can use this to lower your tax liability by increasing your expenses for write-off.
Any equipment on your list that can be classified as “obsolete” or “damaged beyond repair” can be listed at full value for write-off. Any equipment that is damaged but still usable can be “written down” in value. For example, if your 3D printer is valued in full at $15,000 but sustains damage to the value of $3000, you can list that $3000 as an expense and reduce the book value to $12,000.
#5. Give employee bonuses and gifts
Bonuses paid out to employees of C Corporations or S Corporations are entirely tax deductible. Owner or shareholder bonuses can also be deducted under the following circumstances:
- C Corporation – The owner or shareholder must have a 50% or higher ownership at the time of paying the bonus.
- S Corporation – The owner or shareholder must own their shares at the time the bonus is paid.
Any “pass through” entities (such as Sole Proprietorships or LLCs) do not qualify for a deduction on bonuses as they are considered to be self-employed by the IRS.
Gifts and awards to employees are also deductible within certain limitations. These include:
- You can deduct no more than $25 per person, per year for employee gifts
- You can deduct up to $400 per person, per year for employee awards of tangible goods (for example, if you give out awards for service or safety). It’s important to check the limits on these awards, for example, no more than 10% may get a safety award each year.
#6. Take advantage of Section 179 deductions
Under the new Section 179, you can take advantage of bigger write-offs for your big expenses. These include any expenses except your structures owned by the business.
The bonus deduction under the Trump tax plan means that businesses can write off 100% of the cost of equipment upfront, rather than the previous 50%. You can also choose to spread the deduction over five years, rather than the old way which was to take the whole deduction in the year of purchase.
Bonus depreciation is in effect for qualified property that is placed in service from September 28, 2017 to December 31, 2022. After this time, bonus depreciation is scheduled to be reduced as follows:
- 80% for property placed in service in 2023,
- 60% for property placed in service in 2024,
- 40% for property placed in service in 2025, and
- 20% for property placed in service in 2026.
Also, vehicles in service after December 31, 2017, can claim the maximum depreciation of $10,000 for the first year (or $18,000 under the 100% bonus depreciation).
#7. Donate excess inventory
One deduction that is often not recognized by companies is found under Internal Revenue Code 170(e)(3). This states that you can claim a deduction for contributions of inventory or property to an organization prescribed under Section 501(c)(3) – a charitable organization.
If your business sells goods of any kind, it is important to know about and understand this deduction. Basically, you can donate excess inventory and claim the value of the inventory as a tax deduction. In some specified cases, you can even claim an amount equal to the costs of the inventory, plus 50% of its regular profit.
It’s a good way of not only making (or at least recovering) something from unprofitable inventory, but helping nonprofits in their missions.
#8. Buy captive insurance
Captive insurance is where you form an insurance company that is owned by your company, known as a “Captive.” The purpose of the Captive is to insure your company against risk. You then pay premiums to the Captive which are tax deductible for your company.
There are some tax complexities in the setup of a Captive, and generally speaking, it is better suited to companies that have revenue of at least $2 million due to the amounts involved and the compliance work to be done.
The premiums are not considered to be income for the Captive, but when the Captive has matured, money is taxed at lower dividend rates. Captive insurance is used by companies that:
- Choose to put their own capital at risk
- Want to work outside of the commercial insurance marketplace
- Have specific risk financing objectives.
#9. Use the pass-through deduction
This deduction is specifically for any entity considered to be “pass-through” for the treatment of taxes. So this includes Sole Proprietorships, S Corps, LLCs and Partnerships, where income is treated as personal income of the owner.
The specifics are found under Section 199A of the new tax law. This allows business owners to deduct 20% of Qualified Business Income (QBI). So, for example, you might take steps to start a pension plan that helps to boost your deduction.
This is a temporary deduction, expiring after 2025 and there are some restrictions and specifications. It’s important to discuss this with a tax professional.
#10. Examine your business structure
Your business structure has everything to do with how you are taxed and what deductions may be allowed. Depending on your circumstances, a change of business structure may be useful from a tax minimizing perspective.
For example, an LLC may reduce their liability for self-employment taxes by filing an S Corporation election. This allows you to take some income as salary and some as a distribution, which is taxed at a lower rate.
As with many things to do with taxes, this is a fairly complex subject though. It’s important to get qualified advice on business structure.
#11. Look at paid leave policies
A new tax credit (which currently expires after 2019) is for paid family and medical leave, paid to your employees. The notice from the IRS states:
“An eligible employer’s written policy must provide paid family and medical leave, as described in Section B of this notice (Q&A-8 through Q&A-11) and must satisfy the minimum paid leave requirements set forth in Section C of this notice (Q&A12 through Q&A-21). In summary, an eligible employer’s written policy must provide all qualifying employees with at least two weeks of paid family and medical leave (prorated for part-time employees), at a rate of at least 50 percent of the employee’s normal wages, as these terms are defined and described in more detail in Sections B and C of this notice. In addition, if the employer employs any qualifying employees, as defined in Q&A-12, who are not covered by title I of the FMLA, the employer’s written policy must include “non-interference” language, as set forth in Q&A-3.”
The amount of the credit ranges from 12.5% to 25%.
#12. Track and report everything efficiently
One of the best ways to ensure you minimize tax liability is to ensure that everything is tracked and reported efficiently. Poor record-keeping can be costly, not only because you may have to pay someone extra to remedy it, but because you could miss things that are important to record for your deductions or credits.
Clean books start from the beginning of the year, rather than a late scramble to get them together for tax season. This helps to ensure you are prepared to take advantage of all tax incentives and avoid any late penalties.
#13. Engage your CPA for tax planning
Lastly, engaging a CPA with the qualifications and experience to deal with your particular circumstances can save you a lot of money and ensure you minimize tax liability.
Tax planning is an important task for every business. Your accountant keeps up with changes to the tax code and knows what you can do to the best advantage of your business. The best experiences with minimizing taxes tend to happen when tax planning has occurred at an early stage. You may find that it’s too late to take advantage of some deductions if you wait, or that it’s complicated back-tracking what you needed to have done.
There are a number of strategies for minimizing your tax liability. We’ve outlined a few here that businesses may be able to use. While we put tax planning with your CPA last, this is something we’d advise businesses to do first. Find out what you qualify for and how to make the best decisions for your specific position.