Year-end Tax Planning Tips for 2014
We are already half-way through the final quarter of the year—this means another tax year is wrapping up for your business. Have you taken any measures to get your business finances in order before the end of 2014? There are a few things you can do to make your taxes more or less predictable, and today we’ll talk about some of these strategies, but first let’s recap how your taxes are determined.
What Affects Your Business Tax Rate
Your Business Structure
An S corporation, a C corporation or an LLC each has its own tax implications. For example, an S corporation doesn’t have to pay taxes at the corporate level—instead they are passed through to the owners and are filed as personal income. A C corporation income is taxed twice—once as a corporation and then again as it’s passed as dividends to the shareholders. And an LLC is taxed similar to an S-corporation, but has better personal liability protection. If you feel like your business structure is not working out for your business or causes unnecessary expenses, it might make sense to conduct restructuring.
Your Accounting Method
There are two main accounting methods your business can use, each different in the way they recognize income and expenses for tax purposes. The cash method implies that income or expense occurs as it is paid, i.e. credited to or deducted from your bank account (or your pocket). According to the accrual method, the income or expense happens when the services or goods are received or delivered, regardless of whether the money changed hands. When it comes to taxes, the same transaction may be recorded in December or January, depending on which accounting method is used.
Your business’s income is what places you in a certain tax bracket, determining your tax burden. Your income is the most flexible of the three factors, and there are strategies to adjust it at the end of the year to make sure you fall in the right bracket.
Traditional Year-end Planning Strategies
Defer income to 2015
Income is taxed the same year it is received, so by deferring some of it to 2015 you can avoid paying this tax now. However, this only makes sense if you think you’ll be staying in the same or lower tax bracket next year. Otherwise, you might end up paying more money in taxes later versus less money now. This is why it help to work with your trusted Maryland accountant to make accurate projections in regard to your profits.
- delay your invoices so you don’t get paid until the next year (if you are using cash method of accounting)
- delay delivery of services or goods until the next year (if you are using accrual method of accounting)
- delay selling your assets that have appreciated
Accelerate deductions in 2014
Take advantage of all deductible expenses you can think of, as well as available tax credits. Whenever possible, pay in advance for deductible business expenses, such as:
- business operating expenses (supplies, repairs or equipment)
- employee benefits plan
- business insurance
- startup costs
- business use of a personal vehicle, etc.
Leverage Your Losses
Losses can also be used to lower your taxable income. A net operating loss (NOL) occurs when your deductions for the tax year are more than your income. NOL can be carried back up to two years or forward up to 20 years to recover past taxes or offset future taxes. Here are some possible losses your business might be able to deduct:
- uncollected debts
- natural disaster or theft losses
- depreciating assets
Avoid Tax Evasion
All of the above strategies are absolutely legal—what is illegal is tax evasion. Tax evasion can be deliberate or it can happen due to poor accounting practices or lack of supervision. Either way, inconsistencies in your business tax return may trigger an IRS audit that may lead to extensive penalties. Tax evasion may take many forms:
- Omitting certain types or portions of your income stream
- Maintaining separate sets of books and making false entries
- Failing to keep adequate records
- Claiming false deduction or inflating your expenses on applicable deductions
- Concealing funds by transferring your assets to someone else
- Disguising a transaction as something else
- Claiming personal expenses as business expenses
Getting your taxes right takes some planning. Getting the most out of your tax return takes experience. Our accounting specialists at The CFO Source are just a phone call away if you need advice or help preparing your Maryland taxes. We stay up to date on the latest legislation, making sure we pass along any new opportunities to save money to our clients.
Contact us at 410-242-0526 to talk about your tax preparation questions.