"A closely held company that is profitable should seek an outside tax planning firm just to take a second look at how they are structured and how they are treating all transactions," Colombik says. "That doesn't mean their accountant is bad or their attorney is bad. It's a way for someone to come in and recommend possible alternatives." Those alternatives can potentially help your business save a bundle.
How to Save on Taxes
One of the first questions you need to determine is whether you need to enlist the help of a professional to handle your business taxes -- and help you plan in advance so that you can take advantage of certain deductions. "I get asked frequently how to determine when you need to talk to a professional and there are two ways to gear it," Colombik says. "One way is to look at the tax and calculate whether it will cost me less to talk to a professional than to pay my tax bill. The other way is to consider that if you're not paying a lot of tax in that area now, but you know you are going to be in the future, you can find out if there is a way to plan properly."
Common ways to save on taxes
You can take advantage of some standard tax rules that can save your business money. Here are some examples:
- Contribute to a retirement plan. If your business is profitable, you can shelter income in a qualified retirement plan that will provide you with a tax deduction for your contributions, defer tax on earnings on contributions (tax is ultimately paid when you start taking money from the plan, usually at retirement), Weltman says. And, if you have employees, you can gain employee loyalty for providing them with a retirement savings opportunity. Learn more about your retirement plan options from IRS Publication 560, Retirement Plans for Small Business, at www.irs.gov.
- Adopt an "accountable plan." If you have employees and reimburse them for using their vehicles on company business, adopt an accountable plan to save them income taxes and save the company payroll taxes, Weltman says. This arrangement lets you reimburse an employee for business expenses without having to treat the reimbursements as income to them. Result: the reimbursements are not included in the employees' W-2 form (the employees are not taxed on the reimbursements) and the company saves payroll taxes (FICA and unemployment taxes) on these amounts. Learn more about accountable plans in IRS Publication 463, Travel, Entertainment, Gifts, and Car Expenses, at www.irs.gov.
- Defer income and accelerate deductions. There are several steps you can take near the end of the year to put off income into the next tax year and increase your deductions in the current tax year. "In the last month of the year, send your bills out a few days later," Colombik says. That means getting paid a few days later in January of the next year and being able to defer the income, instead of getting paid in December of the current year and having to declare that income immediately. Similarly, one way to accelerate your deductions is to see what bills you have due in January and pay them before the end of December so that you can take that deduction during the current year, Colombik says.
- Structure your business the proper way. Colombik says that this is the "single most overlooked aspect in tax planning." Most businesses that start out small don't change the structure of their business when they should. For example, if you have a closely held company in which the income passes through to you, the owner, those are usually set up as an LLC or an S corporation. While there is nothing wrong with those structures, you might be able to gain tax advantages by structuring your company as a C corporation, in which the first $50,000 of your income is taxed at a rate of 15 percent as opposed to a 35 percent rate if you're in the highest tax bracket, he says.
- Consider adding to employee benefits instead of raises. One way to save on taxes for you and your employees is to compensate them by increasing your contribution to their health insurance costs instead of giving them the same amount in terms of a salary increase, Colombik says. "The employer could give everyone a $400 a month raise but then the employee would have to pay income tax, FICA tax, and Medicare tax on those wages. The employer would have to pay the employer share of FICA, Medicare and may have to pay federal and state unemployment taxes as well," he says. "Let's say the employer went to employees and said, 'Instead of giving you $400 more, the company is going to pay $400 more for your medical insurance. That eliminates the income tax, FICA, Medicare and unemployment taxes." The employer saves and the employee saves.
Recommended Resources
American Association of Attorney-Certified Public Accountants
The only association in the country whose members are professionals dually qualified as both attorneys and CPAs.
Federation of Tax Administrators
The Federation of Tax Administrators provides services to state tax authorities and administrators including research and information exchange, training, and intergovernmental and interstate coordination.
Free Management Library
A library of publications regarding taxes for small, for-profit businesses.
Internal Revenue Service
View the government's Small Business and Self-Employed One Stop Resource on federal taxes. Find an A to Z index of topics for small business, business news, links to forms and publications, and guidance on tax-related responsibilities for businesses with employees
Small Business Administration
Link to a variety of business tax topics, including business taxes, e-file for business and self-employed individuals, state and local taxes, and employment taxes.
State and Local Government on the Net
Access a directory of state, county and city government websites to find information about state income taxes and state and local sales taxes.
Related Links
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Surviving Tax Season
Five new rules that you shouldn't miss.
Inc.'s Guide to Business Taxes
Everything you want to know about taxes that affect small or mid-sized businesses
