Login

TAX PLANNING

Chess Concept Final 960
Once more it’s time to play another deep game of chess with the IRS. Are you ready?

 

2015 is coming to an end but there is still time for business owners to make smart decisions now that will minimize the taxes they will owe next year. Here in this article I discuss several major tax planning strategies and considerations.

 

Get a Tax Projection
You can’t improve your position if you don’t know where you’re at right now. The starting point is to request a tax projection from your accountant based on income and expenses through November. This projection will specifically quantify the taxes you are likely to owe by April 15th next year. A tax projection prevents a nasty “April Surprise” and will also identify opportunities to minimize taxes before 2015 comes to an end.

 

Buy Deductions
If you don’t like the results predicted by a tax projection then one of the things you can do is ‘buy deductions.’ The first major deduction available to small business is depreciable assets. If your business has a legitimate need for equipment or vehicles then now is the time to buy. Section 179 allows businesses to expense the statutory amount of the cost of an asset (every December Congress usually engages in a last minute scramble to change the law and keep the maximum Section 179 deduction at its historical limit of $500,000.)

Vehicles also qualify for Section 179 expensing. Weight matters. Vehicles with a Gross Vehicle Weight Rating “GVWR” of 6,000 pounds or more qualify for more generous deductions than smaller vehicles. Confirm the GVWR with your dealer before you buy a business vehicle.

It doesn’t matter if you buy assets for cash or finance them with a loan. As long as legal title to an asset transfers to you or your business by December 31, 2015 then you will be able to claim depreciation (including Section 179 expensing) on the asset in 2015.

Another important deduction is contributions to a pension plan. There are approximately 21 different types of pension plans available including IRA’s, Roth IRA’s, SEP plans, Keogh Plans and SIMPLE pension plans. In many cases a business owner can fund these plans after year­‐end, and in some cases as late as the extended due date of a tax return.

Pensions are a ‘pay to play’ system because the amount that can be funded is usually linked to compensation. In order to maximize the amount of pension funding you must maximize your taxable compensation (salary or wages.) Compensation is subject to a 15.3% social security tax.

You must pay this tax in order to obtain the privilege of funding many types of pension plans. Math matters when trying to decide if it’s worth it. If your average effective income tax rate is, say, 25% (federal plus Maine) then it would indeed be worth it to increase your compensation, pay the additional 15.3% social security tax, and enjoy a 25% income tax benefit. In this simplified example you would be ahead of the game approximately ten cents for each dollar.

Anti-discrimination rules apply to most pension plans, which means a business owner may have to offer the same pension plan to qualifying employees.

 

Defer Income and Accelerate Deductions
This is a classic tax planning strategy frequently used by many business owners. If 2015 was a great year for you it may indeed make sense to slow down in December and push projects (and taxable income) into the next year. Our income tax system has progressive tax rates. The more you make the higher the tax rate that will apply.

The ability to accelerate deductions depends on what type of accounting method your business uses. Those of you using the cash method of accounting can generally claim a deduction when a bill is paid (there are exceptions though.) Under the ‘mailbox rule’ an expense is deductible when you put a check in a mailbox or hand it to a Post Office carrier. Unmailed checks dated December 31 that are not sent out until January won’t be deductible until January.

It gets trickier if your business uses the accrual method of accounting, where expenses are (usually) deducted when a bill is incurred, regardless of when it is paid. Important tax rules such as the “all events test” and the “recurring item exception” clarify if and when an accrued expense is deductible for tax purposes. Consult with your accountant for further information on this.

 

Shift Taxable Income to Others
If your business is organized as an S corporation, partnership or LLC it may be possible for you to shift income to someone else. This is a more sophisticated tax planning strategy that may be feasible depending on your family circumstances. Here is a simplified illustration:

Let’s say you have a nephew who is not your dependent and is age 24 or older. Your nephew has just started his career and is paying federal income tax at the bottom rate of 10%.

Your business is extremely profitable and you are paying federal income tax at 35%.

Assuming you and your nephew come to an agreement, you could gift non-­voting stock in an S corporation or LLC to your nephew. Let’s say that after the gift your nephew owns 10% of your business as a passive investor. Because S corporations and LLC’s are ‘pass-through’ entities that means your nephew will be taxed on 10% of any business profit. You have just shifted income that would have been taxed to you to your nephew.

Of course your nephew will ask to be reimbursed for the taxes he will owe on income taxed to him. You would be delighted to do this because he is paying tax at a 10% rate while you would have paid tax at a 35% rate. You save on the differential while remaining in control of the business.

This tax planning strategy assumes there is a legitimate, legally binding agreement between you and your nephew where all the requirements for making a valid gift of an equity interest in a company are respected. Further, there are significant implications to giving partial ownership of a company to someone else, especially if and when a business is sold or liquidated. Careful attention should be paid to these issues prior to implementing this type of strategy.

 

Pay As You Go  
Our income tax system wants taxpayers to ‘pay as you go.’ Quarterly estimated tax payments are required by Maine and the IRS if you owe either of them $1,000 or more. A variety of methods exist to estimate current income taxes. Both the IRS and Maine charge a penalty, called Underpayment of Estimated Tax, when insufficient estimated taxes are paid in during the year.

In effect this is another tax planning strategy that will help you avoid this penalty while also avoiding the financial burden of owing a substantial amount of taxes by April 15th.

The best strategy of all is to think ahead, plan ahead and act ahead.



LEGAL DISCLAIMER

George Adams
Certified Public Accountant Master of Business Administration
Tel: (207) 989-2700 E-Mail: GeorgeAdams@IntelligenceForRent.com
450 South Main Street: The HQ of IQ
Brewer, Maine 04412-2339

©2015 Copyright George Adams CPA MBA. All Rights Reserved.

Business Cases:

Nucor Steel: Into the Storm

10-25-2011 Hits:3020 Company Analysis George Adams

Nucor Steel: Into the Storm

One of the largest steel companies in the U.S.had a forty year track record of unbroken profitability until 2009. How can Nucor succeed in a tougher, harsher climate?

Read more

RITZ-CARLTON (Circa 2008)

12-15-2011 Hits:3170 Company Analysis George Adams

RITZ-CARLTON (Circa 2008)

 The business strategy of luxury with a human face requires both popularity and exclusivity. How can Ritz-Carlton master this apparent contradiction?

Read more

SAS Company Analysis (Circa 1995)

12-13-2011 Hits:2660 Company Analysis George Adams

SAS Company Analysis (Circa 1995)

Does it pay to fly dirty?

Read more

Otis Elevator (Circa 2004)

12-13-2011 Hits:3948 Company Analysis George Adams

Otis Elevator (Circa 2004)

The largest elevator company in the world has to make some tough choices.

Read more

Vertex Company Analysis (Circa 2003)

12-27-2011 Hits:2226 Company Analysis George Adams

Vertex Company Analysis (Circa 2003)

Crucial business decisions can benefit from the insights of combinatoric analysis.

Read more

Walmart Company Analysis (Circa 2003)

12-27-2011 Hits:2278 Company Analysis George Adams

Walmart Company Analysis (Circa 2003)

The largest retailer in the world is getting too big to grow any further without new and better thinking.

Read more

Sara Lee Corporation (Circa 2008)

12-27-2011 Hits:2213 Company Analysis George Adams

Sara Lee Corporation (Circa 2008)

Nobody doesn’t like Sara Lee, until the company started hating itself.

Read more

Southwest Airlines (Circa 2010)

12-27-2011 Hits:2483 Company Analysis George Adams

Southwest Airlines (Circa 2010)

How can the most successful U.S. airline keep it up?

Read more

The Power to Save the World: Fusion, the Unknown Ideal

12-28-2012 Hits:3100 Company Analysis George Adams

The Power to Save the World: Fusion, the Unknown Ideal

Energy is the ultimate question of our time: how do we get it, at what cost and what consequences?

Read more

Business Issues:

IT'S TAX TIME AGAIN

02-03-2017 Hits:841 Business Issue Analysis George Adams

IT'S TAX TIME AGAIN

The 2017 tax filing season opened on Monday, January 23rd when the IRS began processing returns.

Read more

HOW TRUMP DID IT

11-09-2016 Hits:1062 Business Issue Analysis George Adams

HOW TRUMP DID IT

This article is strictly non-political and explains how the billionaire Donald Trump legally avoided income taxes for many years.

Read more

WHAT RECORDS SHOULD YOU GIVE YOUR ACCOUNTANT?

01-13-2017 Hits:971 Business Issue Analysis George Adams

WHAT RECORDS SHOULD YOU GIVE YOUR ACCOUNTANT?

For many people it's not obvious what records and information their accountant needs. This article will discuss the most important information your accountant must know when it's time to do your taxes.

Read more

BEWARE OF DARK CARS

01-13-2017 Hits:756 Business Issue Analysis George Adams

BEWARE OF DARK CARS

One phenomenon that began in the last few years in Central Maine is dark cars

Read more

YEAR END TAX PLANNING

11-29-2015 Hits:1753 Business Issue Analysis George Adams

YEAR END TAX PLANNING

Once more it’s time to play another deep game of chess with the IRS. Are you ready? The clock is ticking....

Read more

Why Are You Using An LLC?

05-20-2012 Hits:5118 Business Issue Analysis Administrator

Why Are You Using An LLC?

It can cost you a fortune if you choose the wrong entity for your business.

Read more

Pi and Pi Squared

10-31-2011 Hits:5194 Business Issue Analysis George Adams

Pi and Pi Squared

How can companies motivate innovation and manage internal conflict effectively?

Read more

Secret Unions: Employee Collusion and Conspiracy

10-25-2011 Hits:5380 Business Issue Analysis George Adams

Secret Unions: Employee Collusion and Conspiracy

Anyone can use Game Theory to try to get ahead. But sometimes there is a better, simpler strategy.

Read more

Jump! Employee Performance On Trial

10-31-2011 Hits:4994 Business Issue Analysis George Adams

Jump! Employee Performance On Trial

The true and the obvious frequently differ, especially when it comes to assessing employee performance.

Read more

You Have to Break Eggs to Make an Omelet

11-30-2011 Hits:4683 Business Issue Analysis George Adams

You Have to Break Eggs to Make an Omelet

Some employees take their work seriously while others don’t.

Read more

The Fallacy of Teamwork Part I: Train of Thought

11-30-2011 Hits:5600 Business Issue Analysis George Adams

The Fallacy of Teamwork Part I: Train of Thought

Is teamwork the answer to every business problem?

Read more

The Fallacy of Teamwork Part II: Michael Jordan Doesn’t Need a Memo

11-30-2011 Hits:6441 Business Issue Analysis George Adams

The Fallacy of Teamwork Part II: Michael Jordan Doesn’t Need a Memo

What does neuroscience have to say about the applicability of the team sports model to business collaboration?

Read more

On the Relative Importance of Sales People and Technical People to Business

11-30-2011 Hits:5052 Business Issue Analysis George Adams

On the Relative Importance of Sales People and Technical People to Business

Is it really true that technical employees are just a bunch of nerds a company puts up with so its star sales people can make big profits?

Read more

Business Cannot Ignore Its Environment

11-30-2011 Hits:5028 Business Issue Analysis George Adams

Business Cannot Ignore Its Environment

The power of goodwill to destroy the most successful companies.

Read more

Artificial Intelligence

11-30-2011 Hits:6882 Business Issue Analysis George Adams

Artificial Intelligence

There is nothing new under the sun, until computers become smarter than the smartest person.

Read more

The Growing Spectacle of Job Lotteries

11-30-2011 Hits:5007 Business Issue Analysis George Adams

The Growing Spectacle of Job Lotteries

A new take on the growing commodification of labor.

Read more

Understanding Tax Clients

06-05-2012 Hits:3287 Business Issue Analysis George Adams

Understanding Tax Clients

The primary cliché of our profession of taxes and accounting is that every client is different.

Read more

Making Business Succeed, Part One: Winning at Retail

06-26-2013 Hits:3476 Business Issue Analysis George Adams

Making Business Succeed, Part One: Winning at Retail

What you don't know may put you out of business.

Read more

Making Business Succeed, Part Two: Fresh Thinking For Farmers

07-23-2013 Hits:2792 Business Issue Analysis George Adams

Making Business Succeed, Part Two: Fresh Thinking For Farmers

There are many reasons for having faith in a seed.

Read more

Making Business Succeed, Part Three: Succeeding with Services

09-05-2013 Hits:4788 Business Issue Analysis George Adams

Making Business Succeed, Part Three: Succeeding with Services

Your journey to success will have many twists and turns. Here are important insights to guide you to success with your service business.

Read more

Making Business Succeed, Part Four: Victory for Vacationland

09-26-2013 Hits:3231 Business Issue Analysis George Adams

Making Business Succeed, Part Four: Victory for Vacationland

Tourism and related businesses dominate the economy of Vacationland.

Read more

Five Key Facts of Life for Non­‐Profits

08-14-2013 Hits:3953 Business Issue Analysis George Adams

Five Key Facts of Life for Non­‐Profits

You may be the last line of defense for your non-profit organization.

Read more

CLOUDY, WITH A CHANCE OF PAIN

07-31-2014 Hits:3551 Business Issue Analysis George Adams

CLOUDY, WITH A CHANCE OF PAIN

The truth about cloud-based accounting and the dangers of bundling.

Read more

TAX RETURN FRAUD IS RAMPANT

04-26-2015 Hits:2045 Business Issue Analysis George Adams

TAX RETURN FRAUD IS RAMPANT

According to a January 2015 news release from the IRS, for the period 2011 – 2014 the tax agency stopped 19 million suspicious tax returns and prevented the issuance of approximately $63 billion in phony refunds.

Read more

GEORGE'S POWER BREAKFAST

01-17-2016 Hits:2866 Business Issue Analysis George Adams

GEORGE'S POWER BREAKFAST

Business owners are the nucleus of their business, the center upon which everything else depends. It is frequently the case that business owners simply can't afford to get sick. Healthy food is the best preventative medicine of all.

Read more

GHOST ASSETS

10-27-2016 Hits:959 Business Issue Analysis George Adams

GHOST ASSETS

Are You Being Haunted By Them? If You Are It’s Costing You Money

Read more

 

Contact Me

Member

Telephone: (207) 989-2700
Fax: 1-866-444-0032
Email - georgeadams@intelligenceforrent.com
Address: 450 South Main Street: The HQ of IQ
               Brewer Maine 04412-2339

Maine Society of Certified Public Accountants
Certified QuickBooks Professional Advisor
Bangor Region Chamber of Commerce
Beta Gamma Sigma and Phi Kappa Phi
National Association of Independent Writers and Editors
Published Contributing Writer-Maine Eagle Magazine
New England Peer Review

 

© 2017 Copyright George Adams CPA MBA. All Rights Reserved.
George Adams - More Than Just a CPASM