On Monday I gave you an excerpt from my book It Starts With an Idea – Tax Tips for Small Businesses; regarding entity selection, Tuesday was another excerpt discussing Employees, and Wednesday was still another excerpt with funding your business, and yesterday we discussed how the Affordable Care Act affects your small business. Today we turn our attention to basic tax strategies that you can use in your business.
Typically, small businesses organize themselves either as a corporation or a limited liability company. These legal structures provide them with protection against their assets. Once these entities are formed, generally they are structured an S-Corporations. To refresh your memory from the first chapter, S-Corporations are a tax election made by either corporations or limited liability companies. S-Corporations are known as pass-thru entities. The entity itself does not pay income tax. The profits or losses simply pass thru to the shareholder. When the profit passes thru the shareholder pays income tax, but avoids self-employment tax.
If you are in business for yourself, you probably pay tax on the cash basis of accounting. What that means is that you will claim income when you receive it, and you claim expenses when you pay them. However, if you make a purchases for which you finance (i.e. use a credit card), you can count those expenses on the day that you became liable to pay for them. That being said; at year end the first thing you want to consider is buying items for your business today, that you will be using for the next three months or so. You can use your credit card to make these purchases to preserve your cash. Unless you are in retail, cash flow is horrible the last few months of the year. If you put these items on a credit card in December, wouldn’t have to pay for them until January. I am not saying go on a shopping spree and get yourself into debt. You need to make sure that you can pay off the entire balance of the card with the next bill that comes. If you have some cash, consider prepaying some expenses that you will have in January. You can prepay your rent, utilities, etc.
Equipment purchases are a commonly used tax strategy. Equipment that you purchase, which is over $500.00 is depreciated. Generally, what that means is that if you spend $1,000.00 on a computer in 2012, you will not be able to take an expense in full for 2013. Instead the cost of the computer is recovered (depreciated) over a period of time. For equipment you have to wait five years to recover the cost. For fixtures and furniture, you have to wait seven years. Different assets have different recovery periods.
However, there is a little something in the tax code that may be reduced drastically in 2013. IRC § 179 allows you to accelerate the depreciation in the first year that the equipment is purchased. In 2012, the maximum deduction is up to $250,000.00. There is a caveat to this deduction. You have to have income to support the Sect. 179 deduction. For example, if you have net taxable income (what you take in less your expenses) of $50,000.00, and you buy a piece of equipment for $60,000.00, you can only take a Sect. 179 deduction of $50,000.00. The remaining $10,000.00 will carry forward to the next year. If you have a net taxable loss from your business, then you can’t use the Sect. 179 deduction.
For tax year 2013, Congress enacted bonus depreciation. With bonus depreciation, generally, you can take up to 50% of bonus deprecation in the year that you purchase equipment. For example, let’s say you have a net loss of ($10,000.00), and you bought equipment worth $25,000.00. You could take depreciation of $12,500.00 on the equipment and end up with a net taxable loss of ($22,500.00). If your business is a pass-thru or a sole proprietorship, you can use that loss to offset any other income that you may have. To use bonus depreciation, the equipment has to be new.
These are just some basic tax strategies that you can use in your business.
For more information visit www.smalleynco.com
If you have any questions you can email Craig W. Smalley E.A.
Author of the books: It Starts With an Idea – Tax Tips for Small Businesses available on Nook and Kindle, The Ultimate Real Estate Investor Tax Guide, available on Nook and Kindle, The Complete Guide to the New Tax Law – American Taxpayer Relief Act of 2012 available on Nook and Kindle, Everything You Wanted to Know about the IRS – Audits, Appeals and Collections available on Nook and Kindle, Tax Avoidance is Legal! The Complete Guide to Individual Income Tax available on Nook and Kindle, The Complete Guide to the Affordable Care Act’s Tax Provisions available on Nook and Kindle, The Complete Guide to Retirement Plans for Small Businesses available on Nook and Kindle, The Complete Guide to Estate, Gift and Trust Taxation, available on Nook and Kindle, The Complete Guide to Hiring an Accountant, available on Nook and Kindle, and The Complete Guide to Subchapter S-Corporations, available on Nook and Kindle.