There is a common misperception that strategic tax planning is reserved for the ultra-wealthy, a luxury that only they could afford—but nothing could be further from the truth. In fact, that whole idea that strategic tax planning is only for big companies is a tax myth. While it is true that big companies can afford a slew of lawyers all sitting around a table, brainstorming ways to pay less taxes, small business owners can get the same benefits.
You’ve got a small business, and it’s finally starting to turn a profit. Your capital gains are rising, and things are looking good. But you’re not out the woods quite yet. There are still multiple ways you can lose money and reduce your capital gains.
Overall, to keep more of what you make, you need to minimize your tax liability. As a small-business owner without a huge accounting department or in-house financial advisors, you’re going to need all the help you can get.
For example, one big area where you might find yourself losing out is through capital gains tax. When you sell capital assets (investments such as real estate and stocks) through your business the difference between the amount you paid for the assets and the amount you sold them for is considered a capital gain or loss. When capital gains are involved, you owe capital gains tax. Effective capital gains management leads to a smaller tax bill, which means you have more working capital and better cash flow. Capital gains tax directly affects how small-business owners deal with assets, which makes proper handling of this tax issue important. Any slip-ups in dealing with capital gains can cost small-business owners valuable tax dollars and result in substantial legal and accounting fees.
10 Unseen Money Losers That Impact Your Capital Gains:
- Not holding on to capital gains for at least 12 months. Short-term capital gains refer to assets that are sold within one year of when they were acquired, and these are taxed at a higher rate than long-term gains. The capital gains tax rate for short-term capital gains is taxed at the ordinary income tax rate, which can be up to 39.6 percent for 2018. Long-term capital gains apply to assets held longer than one year and generally result in a lower tax. In fact, the current top rate for long-term capital gains is 20 percent in 2018 and can be lower, depending on the tax bracket. Due to these substantial differences in tax rates, it is beneficial to refrain from selling an asset that is going to result in a gain 12 months after you have received it so that the gain will be taxed at the lower rate.
- Not taking advantage of installment sales. This method of reporting for a non-dealer is available if at least one payment is to be received after the close of the taxable year in which the sale occurs. The taxpayer can then defer the gain as payments are received in subsequent years. Basically, if you can arrange for an installment payment for capital to have at least one payment to come in after the close of the year, you can defer capital gains tax on it until the following year.
- Not offsetting capital gains with capital losses. If you have excess capital losses of up to $3,000, they can be deducted against ordinary income, and remaining capital losses can be carried forward indefinitely.
- Whether a capital gain is considered capital property or dealer property. Capital property is generally held for investment, whereas dealer property is usually meant for sale. If you are considered to be a dealer in an asset, it will be considered inventory, and capital gains tax treatment won’t be available. Remember: intent is everything. Dealer property versus capital property is the subject of much litigation throughout the history of the tax courts, so much care must be exercised in determining the character of the asset being sold.
- Not doing a Section 1031 exchange. This involves purchasing a “like-kind” piece of property within 180 days of the sale of another. It must be property held for investment or used in the trade or business. The basis and debt of the new property must equal or exceed the basis and debt of the property sold. This law provides the opportunity to defer gains until the subsequent year.
- Not deferring eligible deductions. You might choose to use Section 179 deductions instead of regular depreciation for assets. Section 179 deductions can’t produce or increase a loss and will carry over to next year.
- Not carrying over losses one year forward. Losses in one year can optionally be carried forward to a subsequent year. If your business has a net operating loss of $20,000 this year, you can use that to offset a gain of up to $20,000 in a subsequent tax year. In this way, you can still have a business that’s profitable in one year, (meeting the IRS’s guidelines of showing a profit three out of five years) yet keep the tax advantage from the previous loss. Profit or loss from business is not limited to one year.
- Not taking advantage of business losses that are not deductible in the year when you have the loss. You may be required to, or choose to, deduct these losses in past or future years. It is called a tax loss carryback or loss carry forward, and — it’s something with which you must get a tax professional to help.
- Not structuring your business the proper way. This may be the single most overlooked aspect of tax planning. Most businesses that start out small don’t change the structure of their business when they should. For example, if you have a closely held company in which the income passes through to you, the owner, those are usually set up as an LLC or an S corporation. While there is nothing wrong with those structures, you might be able to gain tax advantages by structuring your company as a C corporation, in which the first $50,000 of your income is taxed at a rate of 15 percent as opposed to a 35 percent rate if you’re in the highest tax bracket.
- Not being proactive about your tax plan. One of the best ways to maximize the benefits of a business loss is to be proactive. You need to look at your business throughout the year and make decisions based on your tax situation. In some cases, making some last-minute purchases can put your business into a state of loss, especially if you’re just on the cusp of profit or loss from business. For example, if you have income from another source, you can also use that business loss to offset your tax burden and keep yourself in a lower tax bracket.
The Tax Blueprint which Financial Gravity’s team members can help you create is that proactive tax roadmap that you can use throughout the year to guide your business tax decisions.
So how can you avoid those money losers and put the tax code to work for you? Call one of our Financial Gravity team members today and make an appointment for a free tax assessment: Let’s Talk!
Running your own small business isn’t easy. Your capital might be low and you’re wondering how to pull together enough resources to keep afloat, let alone figure out how to grow your business. Although it would be ideal, you really can’t run a business on your skill and sheer determination alone. Good news–even small businesses can adopt an investment strategy that helps grow capital if done right. If your business finances are feeling a little thin, or you just want to plan ahead and strategize for growth, it might be time to consider investing. Here are 3 investment strategies financial planners employ that can be the “make or break” for small businesses: Read more
The IRS tax code actually provides many ways for small business owners to save big on their taxes–ways that many of which business owners may not be aware. Here are just five:
Lease Your Home to Your Business for the Maximum Time the IRS Allows
Your home has to be rented for less than 15 days to get the deduction. For example, if you have a board meeting every month, you could host all 12 in your home and claim the deduction. You must also rent your home at a fair rate. The IRS does not allow you to just make up an arbitrary amount to charge your company when you rent your home to your business. It must be commensurate with the average price you would pay to rent another location. You must also issue yourself a 1099 form from your company with the total rent amount paid, which you will then claim on your personal taxes. This will be offset once you list your less-than-15-days deduction. Don’t forget: you must record the minutes of any meetings you have in your home–this will provide further proof to the IRS of the validity of the business conducted there if it is called into question.
Hire Your Children to Work in Your Business as Spelled Out in the IRS Code
A business owner can hire and pay their own child under eighteen tax-free. As long as your child is doing legitimate work and getting paid a reasonable rate, you can pay them up to $6,300 per year before they have to pay a dime in income tax. However, you may still have to pay payroll taxes such as FICA and FUTA, which go towards unemployment and social security benefits. On the other hand, you don’t have to pay payroll taxes for employing your kids if your business is a sole-proprietorship, a single-member LLC taxed as a disregarded entity, or an LLC taxed as a partnership and owned solely by you and your spouse. But if your business is a corporation, you must pay payroll taxes on income to your children. Even in this last case, there may be workarounds, but these are best discussed with a professional tax advisor.
Change Your Health Plan to a Qualified HSA Plan to Save the Most Taxes Possible
HSAs escape taxation by allowing holders to save tax-free money for medical expenses not covered by insurance. Contributions are made into such accounts by employees and/or employers, and unused funds roll over from year to year. The contributions are invested, earning returns over time, thanks to the power of compound interest. Funds can be removed tax-free to pay for qualified medical expenses, including vision and dental. HSA deposits (from an employer or individual) are federal income tax-free and not subject to employment taxes. Secondly, HSA growth from income and investment appreciation is not subject to federal income taxes. Finally, if the HSA funds are withdrawn for qualified medical expenses by the account owner, spouse and/or dependents, such withdrawals are not subject to federal income tax. There is no other place in the tax code which allows ordinary income to escape federal taxation forever. But of course, you have to know the HSA rules and follow them carefully. This is another case where it would be good to consult a tax advisor to help you create the best plan for your business and unique situation.
Maximize Retirement Savings to the Fullest (If You’re Over 50 Chances Are You Are Not)
There are many legal ways to maximize your retirement savings and lower the taxes you pay on them. For example, you could start a diversified retirement plan–the funds will help cut down your tax bill now and grow tax-deferred until you make withdrawals in retirement. In most cases, the cost of opening and administering a plan is pretty small. The four main options for small business owners are a SEP-IRA, a SIMPLE IRA, a Solo 401(k) and a SIMPLE 401(k). For all but SEP-IRAs, a business can be a sole proprietorship, a partnership, a limited liability company or a corporation.
Start a Private Foundation
Establishing a private foundation is a great way to use family funds and property tax-free, all while engaging in charity. However, under the IRS Code, a not-for-profit is not exempt per se from federal income tax. In fact, a private foundation is fully taxable unless and until it applies to the IRS for recognition of its status as a tax-exempt organization; even then, it may lose its tax-favored status if it fails to file annual tax returns with the IRS.
It pays to do your homework–consulting with a tax or financial planner can greatly help with setting up tax savings strategies properly. Find out more about how you can bring on a financial advisor who will truly assist you in not only saving on your taxes but give you a solid plan for the future. Speak today with a Financial Gravity team member, Let’s Talk!
So what do the IRS and clowns have in common? If you guessed “they are both terrifying!” you’d only be half correct. As a small or medium-sized business owner, taxes are only scary if you don’t have a sound tax saving strategy in place. Clowns, on the other hand, are creepy no matter what. Sorry, Bozo.
As your business becomes more successful, and your profit increases, your tax liability will also increase (and if you’re easily spooked, you may even notice a spike in nightmares and panic attacks.) As a small business owner, there isn’t anything scarier than taxes.
So how do you mitigate the fear you feel towards the IRS? Strategic Tax Planning. Like Brian Tracy, once said, “A clear vision, backed by definite plans, gives you a tremendous feeling of confidence and personal power.”
While Financial Gravity can’t help you overcome your fear of clowns or creepy crawlers, we can help you develop a tax savings plan, or Tax Blueprint®, that will allow you to get good night’s rest. Our Tax Blueprint is a tax reduction plan that is customised specifically to you and your business. And the absolute best part about implementing our Tax Blueprint? You’ll never pay more than half of what we save you. The cost of the service will always be less than your total reduction, backed by our 2x savings guarantee.
Let me repeat myself, the amount we save you will ALWAYS be more than what the service costs.
Whether you’ll be shuffling your kiddos around the neighborhood as they beg for treats, watching a Chucky marathon with your significant other, or running away from a chainsaw-wielding zombie butcher at a haunted house, Financial Gravity hopes your Halloween is filled with WAY more treats than tricks.
Member Office Locations
Alabama Arkansas Arizona California Colorado Connecticut Delaware Florida Georgia Hawaii Iowa Illinois Indiana Kansas Kentucky Louisiana Massachusetts Maryland Michigan Missouri Montana North Carolina New Jersey New York Ohio Oklahoma Pennsylvania South Carolina Tennessee Texas Utah Virginia Washington Wisconsin Wyoming