By Jay Thompson
Keep more of what you have earned
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It is now the fourth quarter of the year, how are you doing? This is the time of year that it makes sense to look back and review your company's performance. Why now? Well, you still have time to make adjustments before the end of the year. Most small business owners focus on generating revenue, and while that's important, they often neglect maximizing what they have. You work hard for your money, so it is important to keep what's yours by legally taking advantage of the tax benefits available to you. Here are some tips to keep in mind when you meet with your tax professional.
1) Lower your Adjusted Gross Income
Adjusted Gross Income (AGI) is the number that determines your tax bracket. Many of the deductions you take don't affect your adjusted gross income. Examples are your home mortgage deductions and charitable contributions. The best thing you can do to drop your adjusted gross income is to take advantage of the tax benefits that your small business provides. All of your computers, travel, mileage, meals and entertainment that are related to your business activities are tax deductible. They are deductions that can lower your adjusted gross income. Any justifiable business expense will not only drop your income taxes but also lower your adjusted gross income.
2) Pay distributions out of your S corporation
You can save taxes on S corporation distributions you pay yourself out of your S corporation as a distribution rather than a wage. This is because you don't have to pay Social Security, FICA, FUTA, or unemployment taxes on S corporation distributions. Be mindful that you must pay yourself a reasonable wage before you take any distributions. There isn't any double tax on S corporation distributions like there are on dividends paid out of a C corporation.
You do need an operating agreement for your LLC and bylaws for your S corporation and they must be written in a way to allow for the distributions and give you the tax benefits. You'll need an attorney, CPA or other tax professional for help to make sure you do it right. When an operating agreement or bylaws are already in place, you may need to go back and amend them to get the savings.
3) Independent Contractor status and Independent Contractor Taxes
Never hire an employee when you can get an independent contractor. The individual does have to meet all of the criteria the IRS lays down as the independent contractor test. Once you establish the individual is an independent contractor, he or she is liable for their actions. They pay their own taxes as an independent contractor, so you don't have to withhold anything. There are a lot of rules to pass as an independent contractor so make sure they pass the test!
One of the big issues is not having a written independent contractor agreement. No independent contractor agreement, no independent contractor status.
4) Travel per Diem
When traveling, you don't have to worry about saving every individual receipt; you can use the IRS per diem rate. It works great for meal and hotel deductions, and your travel deductions will be based on what the government allows. These deductions will come out of your company, so it will lower your adjusted gross income, which means it is a great deduction for your taxes and a great bonus to your pocket book personally.
You can look up the current the per diem chart online to see this year's info.
5) Pay your children
Paying your children out of your company is a good way to get money out of your business possibly without the social taxes (Social Security, FICA, FUTA), or at least with a reduced income tax. Make sure this is done properly so you can show the IRS they are receiving pay and not a gift. Paying children out of your company may be the thing you need to lower your adjusted gross income!
These are just a few of the many deductions available to you as a small business owner. Take the time to do this right and discuss your plans with your tax professional. Doing things right now may save you a lot of grief later.
Jay Thompson is a Business Consultant with the CSU Bakersfield Small Business Development Center. The CSUB SBDC provides premium, one on one, no cost consulting to small business owners in Kern, Inyo and Mono Counties. For more information visit their website at http://www.csub.edu/sbdc.
