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What Are The Tax Planning Strategies For a New Business?

June 5, 2019

A successful tax planning strategy relies on three main pillars: maximizing deductions, reducing income, and tapping on lower tax rates.

The purpose of tax planning, however, is to help you reach your financial goals.

Although the operations of your business may be overwhelming at times, it’s never too late to devise an effective tax planning strategy.

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Tax Deductions

Ever since tax reform transformed the way deductions are conducted, taxpayers have to rely on standard deduction practices. Nonetheless, you could still get a good amount of money in a number of ways.

And last year’s tax reform bill significantly improved the structure of tax deductions and tax credits.

The common misguided perception of higher probability to not qualify should be dismissed. For the last three years, Americans claimed more than $1 trillion in tax deductions.

The trick is to lower your taxable income to ensure a lower tax bill. And tax deductions are calculated by subtracting your adjusted gross income (AGI).

Understanding AMT

The idea behind implementing Alternative Minimum Tax (AMT) was to discourage wealthy taxpayers to not be extravagant about their legal tax deductions. As a result, a vast majority of middle-class income earners have been affected.

AMT is calculated differently for your regular tax liability. As per AMT math calculation, taxpayers are generally forced to pay the higher amount.

AMT deduction doesn’t even have relevant exemptions in place to comfort taxpayers. And your gains or losses will have to be added in your total AMT amount.

That said, you could claim these deductions by filling out Form 1040 that affirms your qualification and the usage of tax deductions.

What are the Tax Planning Strategies for New Business?

The new businesses planning to deploy tax strategies need to understand that the overall profit of the business is not to be confused with the calculated figure after taxable income. And the taxable income is affected by the laws that govern to recognize and allow the deductions of the income.

Here are some of the most efficient tax planning strategies for new businesses that can assist throughout the tax year:

Income Deferral

As a new business owner, you may have received income that is yet to be earned. Therefore, exclude the amount until the next tax year to defer your income.

And for tax accounting method, you will need to decide whether to run business operations on ‘Cash’ or ‘Accruals’. And small businesses are known to use cash-method for the sole purpose to micro-manage the current and next (2019-2020) business year’s income.

You could have your term deposits mature until 30 June to defer the income via gained interest. And invoices to customers can also be deferred until after 30 June since there’s no burden of cash flow for a new business.

The payment of expenses with checks a couple of days before the year-end is highly recommended. Hence, expenses can be deducted in the current fiscal year despite the fact they won’t be cashed or deposited until the next year. You can send the checks through a certified mail.

To defer income and increase deductions means postponing your tax bill for the next year. A new business can set the criteria to fall under lower or higher federal income tax rate bracket.

The aforementioned strategy, however, applies only if you want to conduct business operations in the lower tax bracket for the next year. Keeping that in mind, you can increase your income in the first year and postpone deductible expenses until 2020 to be in a higher tax bracket.

Depreciation for Assets

The Tax Cuts & Job Act (TCJA) legislation allows you to claim total depreciation value on a new or used property, assuming that they’re purchased in the current tax year. Subsequently, your new business can write-off the total cost incurred on this year’s return for all or some of the assets purchased.

Also, seek the advice of a tax expert to assess what types of assets can qualify to get 100% depreciation value.

With the help of TCJA, you can similarly depreciate purchased vehicles used primarily for the business. The law grants new and established businesses to benefit for entire first-year depreciation deduction on new and used vehicles that are 50% functional for business operations.

SUVs, pickup trucks, and vans are qualified for 100% bonus depreciation as vehicles are just used to carry heavy equipment. The verification of the manufacturer’s label is a conditional factor that makes sure the gross vehicle weight rating (GVWR) is above 6000 pounds.

Benefit from Section 179 Deduction

New business owners can claim Section 179 deductions to qualify for real property expenses of up to $1 million at the beginning of each tax year.

Although there’s no limitation set to qualify for real property expenditures, the maximum annual allowance is calculated on each dollar value.

Also, any upgrade to your non-residential building or furnishing of an interior portion of the office qualifies you for real property. However, the additional expenses incurred to increase the infrastructure capacity of the building or elevator won’t qualify you for the real property.

TCJA has expended the criteria as to what qualifies to be real property in the tax year beginning from 2019. Alarm systems, fire protection mechanisms, HVAC tools and equipment, security systems, and roof expenditures now fall under Section 179.

The items, however, must be in service of the tax year beginning 2019 to qualify. And the new business service should be located in a non-residential building.

Review Inventory

Reviewing inventory may sound more applicable to established businesses, but small businesses should also review their inventory after each quarter to see if there are any damaged or obsolete items in the workplace environment.

The value of these old items may be lower than the newly purchased inventory, but upon revaluation, they can help you make sizable deductions for your new business. And when one starts out on a new venture, avail every opportunity that is at your disposal.

Take Care of Bad Debts

The bad debt strategy applies strictly as a precaution to write-off any previous debts that may have direct or indirect irreversible consequences on the newly formed business entity.

And the strategy is also applicable if your new business is in a transitioning mode. Furthermore, recognize the bad debtors before the operations of the new business commence.

The recovery of an unpaid debt should be avoided to benefit from deductions. And in case of recovery, the amount would have to be included in the current taxable income.

Make Necessary Concessions

Small and new businesses that have turnover lower than $2 million can make numerous concessions to claim deductions.

For example, new business owners who are planning for prepayments on their expenses for the next twelve months on registration, subscriptions, insurance can get a tax deduction for the whole current financial year.

Also, new business owners should avoid contribution caps of more than $25,000 annually or risk paying an unreasonable tax of 46.5%.

The QBI Deductions

Sole proprietorship, partnership, S corporation, and even LLCs operate as a pass-through business entity.

A number of elements have been introduced in view of new deductions on qualified business income (QBI) for pass-through business entities. According to TCJA, deductions can go as high as 20% for the beginning of tax years from 2019-2025 on the new business owner’s QBI.

The QBI deductions, however, are specifically designed to facilitate non-corporate taxpayers such as estates and trusts.

And since tax planning can increase or decrease your QBI deduction, certain limitations have been put in place to safeguard taxpayers.

Set-Up a Retirement Plan

Avoid the preconceived notion that only established and experienced businesses are suitable to set-up a favorable retirement plan.

The fact is, it’s never too early or late to get the benefit from a retirement plan for notable deductible contributions. For instance, you can set up a SEP-IRA to add $55,000 as a maximum amount with a 20% contribution of earnings to your account, that is; so long as you’re self-employed or working for your own firm.

Small businesses, on the other hand, have options to add the 401(k) plan, SIMPLE-IRA, and benefit pension plan for higher deductible contributions.

Although the last date to set-up SEP-IRA for new business owners was 15th Apr. 2019, you can still make contributions up until April. 15 of 2020, without having an operational business account for the current calendar year.

Tax Consolidation

If your new business model forms into more than just one location premises, it would be wise to consolidate by the end of the current tax year.

The consolidation would assess each tax entry to offset profits and losses to be more simplified.

Closing Remarks

As 2019 has already reached its second quarter, it would be sensible for new ventures to be more insightful and assess the outlined strategies.

And don’t rely on instincts or available data that you could muster in a short time, but seek the guidance of a tax professional to devise suitable strategies for your business model.

Amy Schwende

Amy is a tax attorney with 10 years of public accounting experience. She has served a wide range of clients throughout her career with a focus on S corporations, partnerships, and their owners. In her free time she enjoys biking, reading, and spending time with her family.

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