You’ve been working hard to meet your business goals and that time of year finally rolls around: tax season. No matter what way you look at it, what your feelings about taxes are, or how prepared or unprepared you feel, it’s important to have tax planning strategies in place.
Tax planning can help you avoid even more headache, especially if you are a small business. You want to file correctly on the first go around, and the best way to do that is by working with a trusted tax professional and staying organized all year.
If you are reading this and groaning about, there is one piece of advice that needs to sink into your head as a business owner: taxes are not a once a year deal, it’s a year-round process.
Happy corporate tax planning
Let’s breakdown how taxes affect business and what benefits may apply to you.
What’s New for 2018 & Beyond
In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA) also known as the Trump Tax Cuts Act. How does TCJA tax legislation impact your business?
If you own a service business or employ consultants who travel to clients, these work-related expenses are no longer deductible. Passing of the TCJA comes the loss of miscellaneous itemized deductions like home office costs, work-related legal fees, and business expenses such as travel costs. This change can negatively impact small businesses because it can encourage employees to seek out roles at larger companies who can afford to cover these costs.
Also new for 2018 is the Sec. 199A business income deduction which provides owners of business entities other than C corporations with a 20 percent deduction on qualified business income. Exclusions include wage earning, investment income, and guaranteed payments.
However, this could be a large deduction for many business owners. Starting your tax planning now will give you the time to find the tax credits and deductions your business can take advantage of.
2019 Tax Planning Guide
2019 is the first year that TCJA goes into effect. What does that mean for you?
According to Fundera, in 2019, the small business tax rate is a flat 21% for a C-corporation, down from a schedule in when the highest corporate tax rate was 39.6%. The average small business tax rate is 19.8%. Based on their entities, businesses will pay different amounts in taxes. Here is a sample breakdown:
- Sole proprietorships pay a 13.3% tax rate
- Small partnerships pay a 23.6% tax rate
- Small S corporations pay a 26.9% tax rate
- C corporations pay 17.5%
According to the IRS, other changes to tax law for 2019 include standard mileage rate. In 2019, each mile of business use is 58 cents per mile to operate a car, van, pickup, or panel truck.
Tax Planning Strategies
Besides having a trusted advisor you can turn to for questions, accurate reporting, and detailed information on tax laws, it’s essential that you have a tax planning strategy. This will be different for every person based on their business and goals, so make sure to have a good idea of what yours are.
Below are some tax planning mistakes to avoid:
Failing to have enough cash
One of the most common, and biggest, mistakes we have seen businesses make is not having enough cash in the bank to cover their taxes when they are due. The company may then be assessed penalties, resulting in owing more than your business initially planned for and tapping further into your well.
Failing to report trackable income
Companies that employ or operate as independent contractors must report trackable income. If you have done more than $600 in business for a client, they are obligated to send you a 1099. And since this number also gets sent to the IRS, you are obligated to report it when filing your taxes. Don’t try to fudge numbers on how much you’ve made – the IRS takes this seriously.
There is a fine line between maximizing your deductions and going overboard. With the Tax Cuts and Jobs Act, fringe benefits like team outgoings, travel, and work-related entertainment are 100 percent non-deductible. The last thing you want is to owe the IRS more money or pay a penalty for any mistakes.
While claiming too many expenses can signal a red flag to the IRS, you don’t want to miss deductions that you are entitled to claiming. Here are some common examples of deductions that you don’t want to miss out on:
- Startup costs: You can claim up to $5,000 for expenses related to getting the business up and running.
- Education: The Lifetime Learning Credit allows you to deduct up to $2,000 a year based on 20% off the first
- $10,000 spent on education after high school. You don’t have to be working on a degree to claim a deduction – it can be for classes related to your business.
- Business services: Anything that helps your business run, from PayPal to your Wi-Fi plan can be deducted.
- Inventory: Owners can claim deductions for unpaid goods. This does not apply to services, unfortunately.
- Loans and credit cards: If you rack up interest for business purposes, it can be deducted.
Get in contact with your tax advisor
It’s never too early to start your tax planning – in fact, it better if you are mindful of this throughout the year rather than trying to squeeze this in during an already stressful time of the year. If your business does not currently have a tax advisor and trusted CPA, now is the time to find one who is well-versed in your industry. Since your taxes can make a financial impact on your business, it’s critical to go to someone with experience.
If you have any questions or uncertainties regarding what you should expect from your tax advisor, you should read this.
Contact us today to find out how our services can help your team build a tax planning strategy.
Sources: Harvard Business Review. (2018). End the Corporate Health Care Tax.