Year End Tax Moves for the Small Business

December 30th, 2015

As 2015 draws to a close, it’s not too late to consider a few moves to help keep more dollars in your pocket when Uncle Sam comes calling.

  1. Our clients often tell us they’ve “emptied out their bank accounts.”  That’s a good place to start but an empty bank account is not the same as no income for your business.  Many items that can legitimately be paid through a business are not expenses for tax purposes.  The biggest two items we run across that don’t lower a business’s income are payments on the principle of loans and 50% of business meals and entertainment.  If you have either of those items, the amount you paid will show up as income on your tax return.  It’s a type of “phantom income.”
  2. Prepay next year’s routine expenses.  The IRS allows a cash basis taxpayer to deduct payments when made if they become due within the next twelve months.  Consider office and malpractice insurance, rent, membership dues and other regular monthly expenses.  Special rules apply to officers’ life and health insurance so they aren’t the best choices to prepay.
  3. Buy equipment that you need for your business.  On December 18 a permanent small business annual expensing limit of $500,000 was signed into law,  the Protecting Americans from Tax Hikes (PATH) Act of 2015.  The law allows a business to expense up to $500,000 of equipment purchases each year.  This was a major victory for small business!  It means that, in most cases, equipment purchased and placed in service can be written off in the year of purchase.  There are special rules for cars but there is a $25,000 limit available for vehicles weighing more than 6,000 pounds and used more than 50% in business.  You can finance the purchase and take the full deduction even if you are paying over several months.  Beware:  this does not apply to most leases.
  4. Use credit cards smartly.  Normally using credit cards is an expensive way to finance a business.  A bank line of credit or loan is preferred.  However, at the end of the year any expenses charged may be deducted when charged as opposed to when paid.  This allows a company with no available cash to pay some bills at year end.  Pay off the credit card as soon as possible the following year.  (And remember paying off credit card bills are not expenses except as to interest…see 1 above.)
  5.  If you don’t have a retirement plan, consider setting up a SEP before year end.  These may be funded up to the due date of your return allowing you to offset 2015 income.   This is only for yearend planning.  A full featured retirement plan with a bonded fiduciary is the better choice for a permanent retirement plan.  Setting up these types of plans, however, take time.  Check with us for a recommendation for a proper retirement plan.  Most banks and brokerage houses have prototype forms to establish a SEP. 
  6.  If your spouse or children have helped in the business, consider putting them on the payroll and paying for the services rendered during the year. 
  7. If all else fails, bonus yourself!

The goal is to make your business income as low as possible.

Tags: Income Tax


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