Tax Planning for Small Business Owners

Tax planning is the process of looking at various tax options to determine when, whether, and how to conduct business and personal transactions to reduce or eliminate tax liability.

Many small business owners ignore tax planning. They don’t even think about their taxes until it’s time to meet with their accountants, but tax planning is an ongoing process and good tax advice is a valuable commodity. It is to your benefit to review your income and expenses monthly and meet with your CPA or tax advisor quarterly to analyze how you can take full advantage of the provisions, credits and deductions that are legally available to you.

Although tax avoidance planning is legal, tax evasion – the reduction of tax through deceit, subterfuge, or concealment – is not. Frequently what sets tax evasion apart from tax avoidance is the IRS’s finding that there was fraudulent intent on the part of the business owner. The following are four of the areas the IRS examiners commonly focus on as pointing to possible fraud:

  1. Failure to report substantial amounts of income such as a shareholder’s failure to report dividends or a store owner’s failure to report a portion of the daily business receipts.
  2. Claims for fictitious or improper deductions on a return such as a sales representative’s substantial overstatement of travel expenses or a taxpayer’s claim of a large deduction for charitable contributions when no verification exists.
  3. Accounting irregularities such as a business’s failure to keep adequate records or a discrepancy between amounts reported on a corporation’s return and amounts reported on its financial statements.
  4. Improper allocation of income to a related taxpayer who is in a lower tax bracket such as where a corporation makes distributions to the controlling shareholder’s children.

Tax Planning Strategies

Countless tax planning strategies are available to small business owners. Some are aimed at the owner’s individual tax situation and some at the business itself, but regardless of how simple or how complex a tax strategy is, it will be based on structuring the strategy to accomplish one or more of these often overlapping goals:

  • Reducing the amount of taxable income
  • Lowering your tax rate
  • Controlling the time when the tax must be paid
  • Claiming any available tax credits
  • Controlling the effects of the Alternative Minimum Tax
  • Avoiding the most common tax planning mistakes

In order to plan effectively, you’ll need to estimate your personal and business income for the next few years. This is necessary because many tax planning strategies will save tax dollars at one income level, but will create a larger tax bill at other income levels. You will want to avoid having the “right” tax plan made “wrong” by erroneous income projections. Once you know what your approximate income will be, you can take the next step: estimating your tax bracket.

The effort to come up with crystal-ball estimates may be difficult and by its very nature will be inexact. On the other hand, you should already be projecting your sales revenues, income, and cash flow for general business planning purposes. The better your estimates are, the better the odds that your tax planning efforts will succeed.

Maximizing Business Entertainment Expenses

Entertainment expenses are legitimate deductions that can lower your tax bill and save you money, provided you follow certain guidelines.

In order to qualify as a deduction, business must be discussed before, during, or after the meal and the surroundings must be conducive to a business discussion. For instance, a small, quiet restaurant would be an ideal location for a business dinner. A nightclub would not. Be careful of locations that include ongoing floor shows or other distracting events that inhibit business discussions. Prime distractions are theater locations, ski trips, golf courses, sports events, and hunting trips.

The IRS allows up to a 50 percent deduction on entertainment expenses, but you must keep good records and the business meal must be arranged with the purpose of conducting specific business. Bon appetite!

Important Business Automobile Deductions

If you use your car for business such as visiting clients or going to business meetings away from your regular workplace you may be able to take certain deductions for the cost of operating and maintaining your vehicle. You can deduct car expenses by taking either the standard mileage rate or using actual expenses.

The mileage reimbursement rates for 2015 are 57.5 cents per business mile (56 cents per mile in 2014), 14 cents per charitable mile (unchanged from 2014) and 23 cents for moving and medical miles (down from 23.5 cents per mile in 2014).

If you own two cars, another way to increase deductions is to include both cars in your deductions. This works because business miles driven is determined by business use. To figure business use, divide the business miles driven by the total miles driven. This strategy can result in significant deductions.

Whichever method you decide to use to take the deduction, always be sure to keep accurate records such as a mileage log and receipts. If you need assistance figuring out which method is best for your business, don’t hesitate to contact the office.

Increase Your Bottom Line When You Work At Home

The home office deduction is quite possibly one of the most difficult deductions ever to come around the block. Yet, there are so many tax advantages it becomes worth the navigational trouble. Here are a few common tips for home office deductions that can make tax season significantly less traumatic for those of you with a home office.

Try prominently displaying your home business phone number and address on business cards, have business guests sign a guest log book when they visit your office, deduct long-distance phone charges, keep a time and work activity log, retain receipts and paid invoices. Keeping these receipts makes it so much easier to determine percentages of deductions later on in the year.

Section 179 expensing for tax year 2015 allows you to immediately deduct, rather than depreciate over time, up to $25,000, with a cap of $200,000 (down from $500,000 and $2,000,000, respectively, in 2014) worth of qualified business property that you purchase during the year. The key word is “purchase”. Equipment can be new or used and includes certain software. All home office depreciable equipment meets the qualification.

Some deductions can be taken whether or not you qualify for the home office deduction itself. It’s never too early to meet with a tax professional to learn more about home office deductions. Call today to schedule a consultation.

Changing Jobs? Don’t Forget your 401(k)

One of the most important questions you face when changing job is what to do with the money in your 401(k). Making the wrong move could cost you thousands of dollars or more in taxes and lower returns.

Let’s say you put in five years at your current job. For most of those years, you’ve had the company take a set percentage of your pre-tax salary and put it into your 401(k) plan.

Now that you’re leaving, what should you do? The first rule of thumb is to leave it alone because you have 60 days to decide whether to roll it over or leave it in the account.

Resist the temptation to cash out. The worst thing an employee can do when leaving a job is to withdraw the money from their 401(k) plans and put it in his or her bank account. Here’s why:

If you decide to have your distribution paid to you, the plan administrator will withhold 20 percent of your total for federal income taxes, so if you had $100,000 in your account and you wanted to cash it out, you’re already down to $80,000.

Furthermore, if you’re younger than 59 1/2, you’ll face a 10 percent penalty for early withdrawal come tax time. Now you’re down another 10 percent from the original amount of $100,000 to $70,000.

Also, because distributions are taxed as ordinary income, at the end of the year, you’ll have to pay the difference between your tax bracket and the 20 percent already taken out. For example, if you’re in the 33 percent tax bracket, you’ll still owe 13 percent, or $13,000. This lowers the amount of your cash distribution to $57,000.

But that’s not all. You might also have to pay state and local taxes. Between taxes and penalties, you could end up with little over half of what you had saved up, short-changing your retirement savings significantly.

What are the Alternatives?

If your new job offers a retirement plan, then the easiest course of action is to roll your account into the new plan before the 60-day period ends. Referred to as a “rollover” it is relatively painless to do. The 401(k) plan administrator at your previous job should have all of the forms you need.

A word of caution: Many employers require that you work a minimum period of time (e.g. three months) before you can participate in a 401(k). If that is the case, one solution is to keep your money in your former employer’s 401(k) plan until the new one is available. Then you can roll it over into the new plan. Most plans let former employees leave their assets in the old plan for several months.

The best way to roll funds over from an old 401(k) plan to a new one is to use a direct transfer. With the direct transfer, you never receive a check, and you avoid all of the taxes and penalties mentioned above, and your savings will continue to grow tax-deferred until you retire.

60-Day Rollover Period

If you have your former employer make the distribution check out to you, the Internal Revenue Service considers this a cash distribution. The check you get will have 20 percent taken out automatically from your vested amount for federal income tax.

But don’t panic. You have 60 days to roll over the lump sum (including the 20 percent) to your new employer’s plan or into a rollover individual retirement account (IRA). Then you won’t owe the additional taxes or the 10 percent early withdrawal penalty.

Note: If you’re not happy with the fund choices your new employer offers, you might opt for a rollover IRA instead of your company’s plan. You can then choose from hundreds of funds and have more control over your money. But again, to avoid the withholding hassle, use direct rollovers.

Note: Prior to 2015, the IRS allowed a one-per-year limit on rollovers on an IRA-by-IRA basis; however, starting in 2015, the limit will apply to aggregating all of an individual’s IRAs, effectively treating them as if they were a single IRA for the purposes of applying the limit.

Leave It Alone

If your vested account balance in your 401(k) is more than $5,000, you can usually leave it with your former employer’s retirement plan. Your lump sum will keep growing tax-deferred until you retire.

However, if you can’t leave the money in your former employer’s 401(k) and your new job doesn’t have a 401(k), your best bet is a direct rollover into an IRA. The same applies if you’ve decided to go into business for yourself.

Once you turn 59 1/2, you can begin withdrawals from your 401(k) plan or IRA without penalty and your withdrawals are taxed as ordinary income.

You don’t have to start taking withdrawals from your 401(k) unless you retire after age 70 1/2. With an IRA you must begin a schedule of taxable withdrawals based on your life expectancy when you reach 70 1/2, whether you’re working or not.

Don’t hesitate to call if you have any questions about IRA rollovers.

Hillary and Bill Clinton Release 8 Years of Tax Returns

Hillary and Bill Clinton paid $43.9 million in federal taxes from 2007 through 2014 on adjusted gross income totaling $139,097,232, according to tax returns released by the former secretary of state’s presidential campaign on Friday.

That put the Clintons near the very, very top of the American economic scale. Their 2012 adjusted gross income of $19.7 million put them in the top 0.01 percent, a level reached by fewer than 14,000 households, and represents a meteoric rise for a couple that once depended on Hillary Clinton’s law firm salary.  She was the prime family breadwinner when Bill Clinton was making $35,000 a year as governor of Arkansas.

The Clintons average federal tax rate during that eight-year period works out to 31.6 percent. In 2014, with both Clintons on the paid-speech circuit and Hillary Clinton on tour to promote her most recent memoir, the couple brought in more income than in any previous year: $27,946,490. They reported paying a federal tax rate of 35.7 percent in 2014 and donating 10.8 percent of their income to charity. Clinton’s campaign chose to release the tax returns along with a letter from her doctor giving her a clean bill of health on an unusually busy summer Friday when the State Department released some of her e-mails from her time as secretary of state and the Federal Election Commission released super PAC donation records.

Taken together, the voluntary and involuntary disclosures amounted to “the most expansive, transparent release of documents ever,” Clinton senior strategist Joel Benenson said on Bloomberg’s With All Due Respect, about the same hour as the super PAC supporting Clinton, Priorities USA, made its filing with the FEC. With the latest release of tax documents, Benenson said, the Clintons will have made public 38 years of tax returns.

That puts Hillary Clinton ahead of one of her chief Republican rivals, Jeb Bush. The former Florida governor last month made 33 years of his taxes public. Another one of the 2016 presidential field’s wealthier candidates, Carly Fiorina, was the first to release details on her taxes, providing two years of reports.

The Clinton campaign moved quickly to exploit the advantage. “If @JebBush wants to call himself the most transparent candidate in the race about his finances, he is going to have some catching up to do,” Brian Fallon, the campaign press secretary, said on Twitter.

“Looking forward to seeing the itemized income sources for Jeb Bush and Associates. On any day of the week,” Fallon added. This came after Bush communications director Tim Miller accused the Clinton team of engaging in a Friday news dump timed to overshadow the court-ordered release of Clinton’s State Department e-mails.

On With All Due Respect, Benenson argued that Bush has failed to detail the source of some $19 million in business fees and dismissed the theory that the campaign was engaging in obfuscation by information. “The campaign releases documents when they have them ready,” he said. “Why not do it all at once?”

Among the nuggets in the Clintons’ tax forms: The couple has his-and-her LLCs, a corporate entity created by independent earners for tax advantages. Hillary Clinton’s post-State Department income from speeches and her book, Hard Choices, was paid to ZFS Holdings LLC, established in Delaware a week after she left the job. Her husband uses a similar entity, WJC LLC, to take in speech and consulting income. The Clintons listed WJC but not ZFS in financial disclosures released earlier this year, and the Clinton campaign did not respond to questions about why the candidate’s LLC was not disclosed.

Since 2010, Bill Clinton brought in just short of $16.5 million for his role as honorary chancellor of Laureate Education, a for-profit college company. He left the position earlier this year weeks after his wife launched her campaign.

In 2014, Bill Clinton made $9 million off of paid speeches and $6.4 million in consulting fees. Of that, $4.3 million came from Laureate and another $2.1 million from GEMS Education, a Dubai-based company that runs preschool and K-12 programs. He made less from those two gigs in previous years—$5.6 million in 2013 and $4.7 million in 2012. In 2011, the former president was paid $2.5 million by Laureate, $500,000 by GEMS and $100,000 by Teneo Holdings, a firm co-founded by former Clinton aide Doug Band.

The Clintons disclosed $3,022,700 in charitable contributions last year, including $3 million to the Clinton Family Foundation and $200 to Hot Springs High School’s class of 1964, for which the former president attended his 50th reunion last fall. In all, the Clintons gave $14,959,450 in charitable contributions between 2007 and 2014, though nearly all—$14,769,000—went to the Clinton Family Foundation, which disburses donations to other charities, including the Clinton Foundation.

Clinton used the release of her tax returns as an opportunity to call for higher tax rates on high-income Americans. “Families like mine that reap rewards from our economy have a responsibility to pay our fair share,” she said in a statement.

In her statement, Clinton emphasized that her family has not always been so wealthy. She and her husband “have come a long way from my days going door-to-door for the Children’s Defense Fund and earning $16,450 as a young law professor in Arkansas—and we owe it to the opportunities America provides,” she said.

Friday’s release covers the years during which Clinton first ran for president, served as secretary of state and then made millions of dollars giving speeches. During the same time, Bill Clinton was making money through speeches and consulting. The Clintons have previously released tax returns going back to 1977 during earlier campaigns and while in the White House.