There are plenty of reasons why small business owners should start planning for taxes right now. With help from a certified public accountant (CPA) or tax advisor, early planning can help minimize the taxes your business owes or maximize your return, leading to sizable savings.
For more about this, Excelsior Growth Fund (EGF) spoke to Daniel Koscielny, CPA and partner at The Bonadio Group, an accounting and financial consultant group with locations across New York State. Here are his top reasons to start planning early.
Reason #1: Businesses that treat tax planning as a year-end activity may not be able to take advantage of tax-saving actions in time for them to be applied to the current tax year.
One of the most common examples is the opportunity to acquire depreciable property to take advantage of current accelerated depreciation deductions. This means that if you purchase an asset for your business, it must be used (or ready for operation) by the last day of the tax year to qualify for any depreciation deductions – but, it may only qualify for limited depreciation deductions if it’s placed in service during the last quarter of the tax year.
Changes in the tax law or the operation of the business that may provide tax deductions or credits is another area that needs early attention, because you need to compile information throughout the year to be eligible. For example, to qualify for the expanded definition of research and development (R&D) expenses and the R&D credit that became law in 2016, your business must compile project-based supporting evidence throughout the tax year. It’s very unlikely that complete support can be accumulated properly at the end of the year.
Reason #2: If performed properly, tax planning is rarely a single-year exercise.
Tax planning should be looked at as a continuous and multiyear process for the most benefit. For example, “bunching” deductions to achieve the lowest tax possible for a given year is a wasted and ineffective effort if the increased taxable income of the following year brings you into higher tax brackets that could have been avoided. This need for the multi-year approach is driven further by expiring tax losses or credits carried over from previous years, or the results of the Federal Alternative Minimum Tax for individuals, which doesn’t allow certain deductions and exemptions in its tax base.
Reason #3: Determining the business entity should be considered for the duration of the company.
Ideally, determining the business entity, such as sole proprietorship or limited liability company, is accomplished when the business is created. However, changes may be made after that point, and the most common is the election by a traditional C Corporation to be taxed as an S Corporation. This election is not always advantageous, however, and should be considered only with a well-prepared, multiyear comparison of the two corporate tax alternatives through the projected cessation of the business.
It’s important to meet with your CPA or tax advisor throughout the year, not just when your taxes are due. As discussed in a previous article on tax planning, this enables your CPA or tax advisor to help you plan to save now and in the future.
While some industries benefit more from tax strategies than others – and the need for tax strategies for a business depends, in large part, on the opportunities and burdens that the tax law places on the industry in which it operates – nearly all small businesses can benefit from the insight and guidance of a tax professional.
And if you’re in manufacturing, for example, historically there have been federal and state tax incentives for job creation and investment in facilities and equipment, leading to the development of strategies that take advantage of these tax benefits. Similarly, the retail industry – which typically hires non-skilled labor – is incented to hire disadvantaged or targeted workers to qualify for considerable federal and state tax credits.
Your tax professional can provide the guidance needed to help develop a smart tax planning strategy, and the best time to start is now.
About Excelsior Growth Fund
Excelsior Growth Fund (EGF) helps businesses in New Jersey, New York and Pennsylvania grow by providing streamlined access to business loans and advisory services. EGF’s signature product, the EGF SmartLoan™, provides up to $100,000 in fast, transparent, and affordable financing through a secure online platform. Larger loans up to $500,000 are also available. EGF is a nonprofit organization and is certified by U.S. Department of Treasury as a Community Development Financial Institution (CDFI). Learn more at www.excelsiorgrowthfund.org.