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Small
Business Tax Planning Strategy
In today's world of ever-changing tax codes, small
business owners are often left behind in terms of proper
tax planning and methods of utilizing before-tax dollars
for business expenses. As a CPA who represents both
employers and employees, and prepares the corresponding
tax returns, I have numerous opportunities to identify
tax saving methods. There are a multitude of choices
regarding non-taxable employee benefits that are
available to self-employed individuals, as well as
corporations, which are often overlooked due to the lack
of good business advice or limited business knowledge of
the owner.
Unreimbursed Business Expense
Many employees find that unreimbursed business expenses
such as mileage, meals and entertainment and personal
medical expenses cannot be itemized on their individual
income tax form 1040 due to not meeting the minimum
percentage requirement or that applying the standard
deduction is more beneficial. Business owners should
reimburse actual business expenses with before-tax
dollars, thus incurring a valid business deduction and
providing employees with an actual dollar-for-dollar
reimbursement. Many taxpayers fail to realize that
itemized unreimbursed business expenses are only worth
the rate of the top income tax bracket that the taxpayer
reaches.
Husband and Wife Joint Ownership
Closely-held corporation officers, in many cases husband
and wife, are often both drawing compensation from the
company. This results in an increase of payroll taxes,
workers compensation and single business tax. Future
social security and disability benefits can be limited
due to both spouses drawing compensation, as opposed to
having the entire salary being paid to the primary
employee.
SEP Plan Availability
Simplified employee pension (SEP) plans are available as
a means to defer before-tax dollars for future
retirement, but more importantly as a tax-planning tool
for the current year. Like an IRA contribution,
self-employed individuals have until April 15th to
establish and fund the plan, but unlike an IRA, can
contribute the lesser amount of $30,000 or 15% of net
self-employment earnings. Employees of the self-employed
individuals qualify for the SEP plans if they have
taxable wages in 3 of the last 5 years. For 1997,
Congress adopted SIMPLE plans, which effectively
eliminated SARSEP plans, and dramatically changed the
rules regarding employee deferred arrangement funding.
There are many more available ways to reduce taxable
earnings which continue to be overlooked by business
owners. The new tax bill has many new provisions,
including wholesale changes to the capital gains tax
rate structure. My next article will address some of the
major changes and attempt to highlight the more generic
and practical tax code amendments.
As always, I welcome your ideas,
comments and critique! |
