Tax planning is hardly a one-size-fits-all process. Throughout the year, business owners and financial planners need to consider countless questions, the answers to which dictate their short-term and long-term strategies.
Here are a few top-line issues business owners should consider in order to ensure their tax strategies are maximizing their company’s money.
The first step to taking advantage of various money-maximizing tax opportunities is to fully understand the rules and regulations, and–as Congress considers President Trump’s long-awaited federal tax overhaul plan (Tax Cuts and Jobs Act)–those rules could quickly change.
Both corporations and pass-through entities stand to be impacted by these potential changes. On the corporate side, the Trump Administration’s current proposal calls for reducing the maximum corporate tax rate, currently set at 35%, to 21%. It also seeks to eliminate the corporate alternative minimum tax and do away with most existing federal tax credits.
For pass-through entities, such as partnerships and S-Corporations, the tax proposal seeks to create a new 20% deduction for certain taxpayers and lower individual tax brackets, which will range from 10% to 37%. These entities are currently taxed at the individual level according to the rates of their respective owners, which ranges from 10% to 39.6%.
These are just a few changes that are included in the Tax Cuts and Job Act. It appears likely that these changes will make it through Congress, but prudent business owners and financial planners will keep a close eye on the bill’s progress as it moves forward. It’s important not to take a cookie cutter approach when comes to these proposed changes. Rather, each situation needs to be analyzed based on your own sets of facts and circumstances.
Even though alternative minimum tax (AMT) may be extinct in 2018 for corporation it will still impact individual owners of pass-through entities going forward. Under the Tax Cuts and Job Act, the phase-out exemptions are increased to $1,000,000 for married taxpayers and $500,000 for single taxpayers. Individual owners of pass-through entities should still take the time to determine whether they are subject to AMT. If they are subject to AMT in 2017, these owners should consider deferring AMT addbacks in 2017 to 2018.
Generally speaking, a business’s expenditures are split into two tax categories: current expenses and capital expenses. Current expenses are day-to-day expenditures-things like rent, payroll, advertising and office supplies-that businesses need to make in order to keep everything running. Come tax time, these expenses can simply be deducted from the company’s income.
Capital expenses are different. Rather than being items or services that help the business maintain its current rate of production, capital expenses are investments in the business’s future. The most common examples are buildings, building improvements, machinery, vehicles, furniture, and equipment. Since the IRS considers these costs investments rather than typical expenditures, deductions are typically taken over the course of several years.
Prudent business owners will map out their capital expenditure needs at least five years in advance, and make sure they match the timing of the purchases with their projected taxable income to take advantage of accelerated tax depreciation methods (bonus and section 179). This strategy helps limit businesses’ tax exposure, and-over the course of several years-helps them save money.
Again, as we mentioned earlier, the federal tax credit landscape could change dramatically depending on where the president’s tax proposal ultimately lands. But, until a tax reform bill is finalized and signed, business owners still need to consider various incentives and credits that could help reduce their tax burdens.
My colleagues at BlumShapiro have written extensively on this topic this year. For a rundown of R&D credits, consider Corey Veneziano’s piece from July. We also have state-specific articles that list a number of available incentives in Rhode Island, Connecticut and Massachusetts.
Finally, most states offer a wide range of incentives that local businesses can take advantage of during the tax season. From programs that reward job creators to grants available to innovative businesses, these existing programs can help businesses offset their tax burdens and increase their profits.
Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.