As hard as it is to believe, 2017 has almost come and gone. For many business owners it’s time to start making the final push to meet last year’s goals while balancing the need to consider the steps to be taken to improve future performance. In an environment with ever changing taxes and regulation we intuitively focus on ways to avoid penalties, interest and other nuisances that pop up when we get behind in fulfilling our annual and monthly duties as taxpayers. Though this is an important part of doing business, sometimes we neglect to take advantage of benefits available to us that are designed to save us tax dollars. So as year-end approaches, here are 10 planning tips to consider that will help save more of your hard earned money and pay less tax in 2018 and beyond.
1. Be ready for tax reform:
Though it’s hard to tell exactly what may happen in regards to tax reform, the odds are in our favor for some significant change in our tax code in the near future. Of all the ideas that have been kicked around in recent months by both the Trump administration and the Republican party, the common theme that remains is that rates are going to fall, and there are going to be some key deductions that go away. Since this is the case, it is time to start considering deferring income to 2018 to take advantage of next year’s rates and accelerating deductions back to 2017 in order to take advantage of expiring tax provisions. This can be done multiple ways, and each taxpayers plan will be different. There is no better time than now to start talking to your adviser on how to best get this done.
2. Succession Planning:
Many business owners have worked very hard to become successful in their chosen field, but very few have developed a solid plan to get their hard earned cash out of the company in the most tax effective manner possible. Through candid conversations about personal goals, and a solid financial plan for the future, this can be achieved if it is adhered to in a disciplined manner. Due to certain roadblocks that may lie ahead, it is not uncommon for the process to take in excess of five years to execute effectively. So get on it now and have the conversation!
3. Proper Entity Structure:
At tax time do you feel like you pay way too much in self employment tax? Do you have a corporation with real estate in it that you are having a hard time getting out? Over the years have you started various entities, and now are unsure as to why your business is structured the way it is? These are all common questions that we hear on a regular basis. As your business changes, the way that you are structured needs to change as well. Staying on top of these issues can save massive amounts of money over time. Though it may sound like a daunting task, it’s not hard to get in front of an independent person, take a step back and evaluate what your best structure could be. Through corporations, partnerships, trusts etc., the code has left a lot of room for you to operate your business effectively.
4. How are you capitalizing your equipment?:
A lot of business owners are well aware that they can write off 100% of the value of certain equipment put into service rather than having to depreciate over 5-7 years, but due to recent changes in tax law it is much easier to take this a step further. If there are assets on your depreciation schedule that have been incorrectly depreciated, you can figure out what the error is and deduct the entire amount on your current return as a catch up. Also, if you did some work on a large piece of equipment or real estate, some of the items that you are still depreciating may need to be written off through what are commonly called “partial dispositions”. Have a professional look through your deprecation schedule, perhaps even have an independent consultant do a cost segregation study. More often than not there is money on the table if it is planned out correctly.
5. Deduction for qualified production activities income:
Taxpayers can claim a deduction, subject to limits, for 9% of the taxpayers “qualified production activities income” for the tax year. This deduction generally has the effect of a reduction in the taxpayer’s marginal tax rate and is widely used in the agriculture and manufacturing industries but is commonly missed by contractors. So if you’re a contractor, or even a sub-contractor and you’ve never heard of this deduction, you may be missing out and it’s time to look at this and take full advantage.
6. Enterprise Zones:
The Illinois Enterprise Zone Act took effect in December 1982, and was designed by the State of Illinois in cooperation with a local government to receive various tax incentives and other benefits to stimulate economic activity and neighborhood revitalization. Starting with an intergovernmental agreement between your local government and the State of Illinois, you can set the location of your business within an Enterprise Zone which will provide you the opportunity to take advantage of a potpourri of tax benefits. Of these benefits, one of the most valuable is the exemption on the state utility tax for electricity and natural gas. The Investment Tax Credit is another benefit that will likely be recognized. This credit allows a .5% credit against the state income tax for investments in qualified property located in the Enterprise Zone. If you are planning on expanding your business, it’s time to get the process started so you don’t miss out.
7. Research & Development:
Businesses often spend a significant amount of time and money improving their business. Whether it be through increasing efficiencies with internal processes or developing a new product line, having a culture of continuous improvement will pay dividends in the future. Even though future gains are the ultimate goal, the IRS and the State of Illinois have placed provisions in the code to help you realize some of those benefits now. If you can document your activities attributable research and development, there are credits available that help alleviate these costs. If you qualify it’s essentially free money, so it’s worth the look.
8. Work Opportunity Tax Credit:
When hiring new employees, many employers don’t realize that through a quick questionnaire or some other form of information gathering, they may qualify for the Work Opportunity Tax Credit (WOTC). If you’ve hired a disabled veteran, someone who has previously been unemployed for a significant amount of time, or even someone who happens to live in a county that is considered “distressed” (they are all over Central Illinois), then you qualify. As is true with the Research & Development credit above, there are some hoops to jump through, but once again this is free money and could be worth the effort.
Many times taxpayers find themselves in a situation where they have been so aggressive in taking losses over the years that when it comes time to sell or if they have a good year, the tax man comes calling in a big way. To keep it simple, the concept of basis means that you can’t deduct more than you put in. This can be managed over time to help you take losses in those years that were not so good but still retain benefit for the higher income years when things are going well. Keeping these concepts in mind will help open an effective dialogue with your tax professional as you plan for the years to come.
10. Information Security
Though this sounds like a generic term, the fact is that times have changed and unfortunately we live in an environment where everybody’s information is at risk. If you have your customer’s financial information on hand, are you properly insured in the event you get hacked and this information becomes public? To take it a step further, how secure is your network? Do you really know or at this point is it just guesswork? Though these are tough questions, they can be answered through the help of others. There are companies out there (including Sikich), that can perform tests on your system, see if you can be hacked into, and help you close the gaps. Something to consider as more and more people end up in the news after their information was stolen.
I could go on all day but to keep this short just remember that tax planning doesn’t occur in a vacuum, and the same plan doesn’t work for everybody. If you ever have any questions feel free to give me a call at any time and we can put something together that works for you.
Drew Long, CPA
ABOUT THE AUTHOR: Drew Long, CPA, has 14 years of experience. Drew specializes in income tax planning and consulting for closely held businesses, their related owners and individuals. He serves a wide variety of clients in public accounting with concentrations in the construction, manufacturing, agriculture and healthcare industries.