Put these tax-saving tips on your to-do list
Improve your bottom line with these tax mitigation strategies
It’s almost time to close the books on another tax year, but it’s also time to be open to the many opportunities designed to alleviate your tax burden. Here are a few to get the ball rolling. While these are by no means exhaustive, they should be enough to get you started when it comes to tax-saving tactics that could work for you and your business. With a complex and ever-changing tax code, it’s a good idea to schedule a meeting with your financial advisor and tax professional.
Did you buy new equipment? Take a deduction.
Section 179 of the IRS tax code was created to encourage businesses to invest in themselves. It allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year from your gross income. This deduction of up to $500,000 is good on new and used equipment, as well as off-the-shelf software. To take the deduction for tax year 2017, the equipment must be financed or purchased and put into service before the end of the calendar year.
It’s important to note, though, that $2 million is the spending cap on equipment purchases. Anything beyond that means the Section 179 deduction will be reduced on a dollar-for-dollar basis. This truly makes Section 179 a small business tax incentive because larger businesses that spend more than $2.5 million on equipment won’t get the deduction at all.
BONUS: Take advantage of the 50% bonus depreciation for 2017, which is generally taken after the Section 179 spending cap is reached. It is available for new equipment only (used equipment qualifies for the Section 179 Deduction, but not this one).
Defer income and accelerate deductions
Obviously, any income you receive by December 31 counts as income for the current year, but there are ways to put off income to the next tax year and also reduce your adjusted gross income this year. There are several strategies to increase deductions now if you expect your income to be at the same or a lower rate next year.
For example, you can send your invoices out a few days later in December to delay receiving payment until January. Conversely, you can prepay some bills that are due in January to take the deduction for this tax year. A little foresight here can add up to big tax savings.
Redesign your company retirement plan
If your business has changed significantly since you first started a company retirement plan, it’s a good idea to make sure this important employee incentive is still the right fit. There are several options to choose from, including SIMPLE IRAs, profit-sharing and safe harbor 401(k)s. A qualified plan offers a deduction for your contributions, and you defer tax on earnings on contributions. Talk to your advisor.
Reconsider your business structure
A multiple-owner LLC is taxed as a partnership by default, while a single-owner LLC is taxed as a sole proprietorship. However, LLCs can choose to be taxed as a C- or S-corporation by filing IRS Form 2553. Owners with an LLC can still elect to be taxed as an S-corporation retroactively at year’s end. There are some conditions that apply, so talk to your tax professional.
Find the silver lining of a net operating loss
If your business losses exceed your income for the year, the excess can lower your income and cut your tax bill in another year. You can apply the loss to prior years’ taxes to get a refund or apply the loss in the future. The rules and formulas for this maneuver are complex, so make sure to consult your tax professional.
Deduct vehicle expenses
If you use your vehicle to visit clients or attend business meetings away from your office, you may deduct expenses by taking either the standard mileage reimbursement rate for 2017: 53.5 cents per mile; or you can calculate your actual expenses. For example, if you drive your car 20,000 miles per year and 10,000 of those miles are for business, you can claim 50% of expenses such as gas, tires, repairs, insurance, license and registration fees, and depreciation. You cannot use the actual expense method if you are leasing a vehicle and previously used the standard mileage rate. So, if your total car expenses are $12,000 for the year, you can claim $6,000. If you own two vehicles, another way to increase deductions is to include both cars in your deductions. Make sure you keep an accurate mileage log and receipts.
Maximize legitimate entertainment expenses
Entertainment expenses are legitimate deductions if you follow the guidelines: business must be discussed before, during or after the meal; and the surroundings must be conducive to a business discussion such as a quiet restaurant (not venues or events such as theaters, ski trips, golf courses, sporting events or hunting trips). The IRS allows up to a 50% deduction, but be sure to keep proper notes and receipts.
On average, sole proprietorships paid the lowest effective tax rate (15.1%), while S-corporations paid double that (31.6%).
– Small Business Association Office of Advocacy
- Engage in tax planning before the end of the year
- Familiarize yourself with the many tax-mitigation tactics
- Discuss these tax strategies with your advisor and tax professional
Changes in tax laws or regulations may occur at any time and could substantially impact your situation. Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.
Capitalize on the growing sustainable investing movement
Investment strategies to accommodate social responsibility become more appealing to socially responsible consumers and investors
You want to grow your business and are looking for ideas. One opportunity you may want to look at is sustainable investing – where investors (and consumers) aim to make a positive impact on society and the environment by factoring environmental, social and governance (ESG) criteria into their investment and purchasing decisions.
How can you get involved in this trend? Yes, one option is to invest in it, but another is take those best practices and incorporate them into your business. Venture capital firms are investing more and more in companies that maintain socially responsible principles, while a growing number of consumers – particularly millennials – are shopping with their conscience.
Objectives of sustainable investing
- Encourage positive environmental, social or governance practices
- Align investments with personal values
- Improve portfolio risk/return characteristics
While there is a common theme of pursuing a greater purpose, there is much variety within sustainable investment strategies, particularly in how they are implemented. Implementation generally takes the form of one or more of the following approaches:
Also known as socially responsible investing or negative screening, this is viewed as the original approach to “responsible” investing. Basically, it excludes individual companies or entire industries from portfolios if their activities conflict with an investor’s values, such as fossil fuels, gambling or alcohol. This, of course, limits the investable universe, which could impact diversification of your portfolio.
You could also apply this exclusionary approach to your business by, for example, dialing back any dealings with companies, industries or even vendors whose values don’t align with yours; encouraging your employees and clients to go paperless; recycling production materials when possible; making your workplace and office machinery more energy efficient; and engaging with the community for sustainable cause events.
This approach combines environmental, social and governance criteria with traditional financial considerations. It has been gaining momentum as portfolio managers consider ESG themes in their decision-making process. It is sometimes implemented as a best-in-class approach by identifying and investing in companies that are the best ESG performers within a sector or industry group. A study conducted cites this as the most commonly used method.1
1 CFA Institute, “ESG Issues in Investing: Investors Debunk the Myths.” 2015
This approach aims to have a social or environmental impact alongside financial return, with a focus on the intentionality and measurement of the impact. The most common products are funds invested in private equity and venture capital, and accredited investors and funds are the leaders in impact investing by asset level.2 With this approach, the liquidity risk and return target can vary dramatically.
2 Global Impact Investing Network, “What You Need to Know about Impact Investing,” https://thegiin.org/impact-investing/need-to-know/#s
Thematic investing focuses on a specific ESG theme, and structures portfolios around companies or industries that support that theme. Examples of such themes include clean energy, environmental protection, sustainable infrastructure, health and social equity.
- Consider whether environmental, social and governance issues are important to you
- Capitalize on opportunities both as an investor and as a business owner
- Discuss sustainable investing with your financial advisor
Essential issues you must address
Do you have the answers? Ask your advisor.
You know all too well that running a business – your business – takes every second you have. It’s always on your mind. But if you’re like so many other entrepreneurs, you may not have taken a step back to see the bigger picture – how your professional and personal financial matters intertwine with each other. And that’s where your financial advisor can be invaluable.
It is crucial that you plan accordingly to maintain balance between the prosperity of your business and your own personal financial well-being. Here are the essential issues you should be discussing with your advisor. They may change over time, of course, as your business matures through its lifecycle from startup to succession planning.
Questions that demand answers
There are matters of controlling costs and cash flow, and using financing and capital wisely. What can be done to safeguard my personal and business assets from creditors? Are there strategies that will help my professional and personal assets work more tax efficiently?
You may have governance issues around making decisions with multiple stakeholders or family members. You may want to reconsider your corporate structure for tax purposes. Is it better to be taxed as a C- or an S-corporation?
Then, there are issues regarding succession planning and having key person insurance to protect yourself or company managers from the unexpected. What is your exit strategy? You need to think about who to transfer your business to and what you’ll need to do that. You need to consider diversifying your personal and professional assets, and integrating your business into your financial and estate plans.
These are all essential matters that you must address. To overlook them leaves you and your business vulnerable to greater risk. It’s time to talk to your financial advisor and benefit from the seasoned advice he or she can offer.
Only 30% of privately held businesses survive into the second generation, and less than 15% survive into the third. (Source: Nuveen Business Owners)
- Familiarize yourself with the many issues/risks you should be aware of
- Recognize that running your business may distract you from addressing them
- Consult your financial advisor for guidance with these important matters
Material prepared by Raymond James for use by its advisors. Raymond James is not affiliated with any companies mentioned in this material.
There is no assurance that any investment strategy will be successful. Investing involves risk and investors may incur a profit or a loss.