Income tax planning for businesses can be a very complex issue that often requires the effort from outside accountants as well as internal executives (depending upon the size of the organization). While tax planning is a complicated subject, there are several tools that can be used to help reduce the tax a business will pay, whether we are speaking about a traditional corporation or a pass-through entity.
Planning for capital improvements (depreciation and section 179 expenses), revenue and expense recognition, and opening your business’s doors in more business-friendly states will allow you to keep your business tax liability to a minimum. I look forward to walking you through these important tools so that you can discuss them with your tax advisor.
Not only can planning for capital expenditures help your cash flow, it can also significantly reduce your income tax liability. If your business net income levels are appropriate, you can write-up to $500,000 of certain capital improvements and expenditures. This will be reduced dollar for dollar if your capital expenditures are above $2,000,000, and the deduction will reduce to $0 if you have capital expenditures over $2,500,000. The section 179 expense is a small business incentive to invest in their future.
In addition to the section 179 expense, many capital expenditures are eligible for bonus depreciation, which is the ability to expense 50% of the improvement right away. Proper planning for capital improvements and large purchases can be a very important tool when attempting to reduce your income tax liability. It is suggested that these purchases be discussed with your accountant if you would like to maximize their benefit.
Along with proper capital expenditure planning, proper revenue and expense recognition can be an important tool in reducing your tax liability. Of course, reducing your revenue and increasing expenses will allow a company to show a lower net income and lower tax liability.
For tax purposes, billing and collecting revenue from a client should be pushed off as long as possible (into the following year). This is often possible for sales towards the end of the year. You can even offer incentives for paying after year-end. Along the same lines, increasing your business expenses will allow you to have a tax liability. Renewing your insurance policy or recognizing utilities expenses (of course where appropriate) in an earlier tax period will help.
Business Friendly States
When it comes to tax rates and filing requirements, not all states are offer the same incentives. In a bid to attract individuals and businesses, a handful of states around the country have no state income tax and low, or no, filing requirements.
Washington State, Texas, Nevada, and Delaware are among the most business-friendly states in the country, which is why they attract some of the larger corporations. On the other hand, states such as New York, California, and most recently Connecticut, tend to be very burdensome.
Although business tax planning is complicated for those professionals that are not in the tax field, there are several tools that you, along with your tax professional, can use to help reduce your tax liability.