Year End Business Tax Planning – Stop Uncle Sam From Eating Your Lunch
Two weeks ago I received a call from an agitated client: “O.G.! I need your help. My taxes are going to be out of control! We made too much money this year!”
My first thought: “Oh, poor baby. You’ve made too much money.”
Then I ran to the nearest phone booth, twirled around in it a bit, and walked out the looking the same as I had 30 seconds earlier, although I was much dizzier.
Time to be the last-minute tax superhero!
If you own a business and you’re doing a little accounting at the end of the year piling up your nickels, you may notice you have a little extra scratch laying around. The bad news is that if you’re like most business owners, whatever is left as of December 31 is rolled up to your personal tax forms and you’re going to pay taxes on it, no matter what your plans are.
For example: You paid yourself $50,000 in 2012 and your business now shows a $50,000 profit. If that extra $50k isn’t spent or expensed by December 31, you’ll be taxed on the entire $100,000. Lovely, isn’t it?
Here are a couple things you can do in the 11th hour to minimize your bill:
1) Pre-pay as many expenses as you can. If your sudden profit is because a client paid earlier than expected, this is probably the best bet. Take a look at January and February expenses and start writing checks. Now you won’t have to worry about expenses next year and can rebuild your excess cash pile.
2) Contribute to your company’s retirement plan. If you don’t have one established already, you’re pretty limited with options, but you can contribute up to 25% of your profit if you’re a sole proprietor to your SEP IRA plan. You have until your tax filing deadline to make that contribution, though, so no hurry. It would make sense to reach out to a tax professional or retirement plans specialist to create a plan for the future.
3) Give some money away – to your employees. If you bonus employees now, there will be two benefits: first, they’ll pay a lower FICA tax before January 1, 2013 and second, you can expense the cost.
4) Buy capital expenditures for your business. Section 179 expenses, as they’re called, are expenses that usually are amortized but can be ‘pulled forward’ to the year of purchase. If you’re considering a technology upgrade, or a company car, today may be the right time.
5) Take a couple bucks and hire a good CPA, EA, or business financial planner. The best time to prepare for unexpected profit is in August, not December. A good advisor on your team will have mapped out all these (and other) strategies long ago and now they’ll be ready to be executed, without having to scramble through year end business tax planning.
Moving into 2013, here are a couple ‘sneaky’ tax ideas that help offset income taxes for some people:
1) Rent your home to your corporation. According to the IRS, “If you use the dwelling unit as a home and you rent it fewer than 15 days during the year, that period is not treated as rental activity. Do not include any of the rent in your income and do not deduct any of the rental expenses.” Fewer than 15 days means 14 days, by the way. Your company has to have monthly board meetings, right? Ever consider renting a hotel banquet hall? No? Why not? Oh…because it’s $1,000 a day! Do the same thing, but from your home! There are a lot of pitfalls here, so you have to do it the right way. But if you had 14 corporate meetings a year…and the lease rate was $1,000 per day…you do the math. Tax free money. Boo-yah.
2) Hire your kids. If your kids are over 7 years old, they can be hired in the family business to do menial tasks. Don’t hire your kids as Senior VP of Sales, but he or she can lick envelopes, take out the trash, etc. Then pay them commensurate with their age and activities. Anything up to the standard deduction (this year is $5,950) is tax free. Pay them $10,950 and contribute $5,000 to their IRA. Again, pitfalls abound, but it may work for you. By the way, a $5,000 annual contribution from age 7-14 growing at 8% until age 60 is worth about $1.8 million. Just sayin’.
3) Establish a real retirement plan and set up a sweet company match system. Remember, you can only do for you what you do for all your employees, so this only works if you’re by yourself. But, you can set up a pretty sweet 401(k) plan and a stellar matching program for yourself if you want. You just need to do it before December 20.
Hopefully this gave you some year end business tax planning ideas to mull over while you enjoy your Williams Sonoma peppermint bark next week. Enjoy Christmas and be sure to take some days off away from work to recharge the batteries. Smart business owners know they’re most productive when they’re fully charged up! Merry Christmas and Happy New Year!