Navigating corporate taxes can seem daunting, especially when the stakes are as high as your company’s bottom line. However, effective corporate tax planning can go a long way towards maximizing your business’s profitability and ensuring compliance.
Whether you’re approaching mid-year review or drafting a plan for the next fiscal year, it’s crucial to arm yourself with a solid understanding of the tax-saving strategies at your disposal.
Mid-Year Saving Strategies
Don’t wait until tax season rolls around to begin implementing tax planning strategies. Here are some mid-year tactics to help position your business for financial success.
Conduct a Mid-Year Tax Review
If you haven’t already, now’s the time to look at your business’s financial situation and implement strategies to optimize your taxes. Review your tax returns, estimated tax payments, profit and loss statements, and other key financial statements to get a snapshot of opportunities to reduce your tax burden while you still have time to make changes.
Maximize Deductions
Maximizing tax deductions is one of the easiest ways to reduce the taxes you’ll owe. These deductions can range from expenses related to day-to-day operations, like office supplies and utilities, to large-scale purchases, like machinery or equipment. To facilitate the process and maximize your savings, ensure you maintain meticulous records of these expenses and understand the IRS rules around what can be deducted.
Consider Accelerated Depreciation
One way to further enhance deductions and reduce your tax burden is through the strategic use of accelerated depreciation. This method allows for a greater proportion of a fixed asset’s value to be depreciated in the initial years of its life, potentially reducing your company’s taxable income and providing more immediate cash flow, especially after substantial investments in assets like equipment or real estate.
However, as a business owners, you should note that higher upfront depreciation deductions could lead to lower deductions in the future (and a higher tax bill). It’s essential to consider both short-term gains and long-term implications when using accelerated depreciation, especially if your business is still growing. As always, consulting with a qualified tax advisor is best when making decisions about depreciation methods.
Explore Tax Credits
Another tax-saving strategy involves taking advantage of available tax credits. Unlike deductions, which reduce the income subject to tax, credits reduce the tax itself. These could include credits for research and development, energy efficiency improvements, or hiring from certain disadvantaged groups. As you prepare your mid-year tax review, research what credits are available and how your business could potentially qualify.
Review Your Business & Tax Structure
The four main types of business structures each have different tax implications, and switching to a new structure could potentially lower your tax liability and better align with your business goals.
Sole proprietorship: The business and the owner are considered the same entity for tax purposes, so the income or losses are reported on the owner’s personal income tax return.
Partnership: Similar to a sole proprietorship, profits and losses pass through to the individual partners, who report their share on their personal tax returns.
Corporation: A corporation is taxed independently from its owners. This leads to what is often referred to as “double taxation.” First, corporations are taxed on their profits. Then, shareholders are taxed again on the dividends they receive. To mitigate this, some corporations choose to be taxed as an S Corporation, which allows profits and some losses to be passed directly to the owner’s personal income without facing corporate tax rates.
Limited liability companies (LLCs): These get the flexibility of being taxed as a sole proprietorship, partnership, or corporation. An LLC protects its owners from personal liability for business debts, much like a corporation, while allowing business profits and losses to pass through to the owners, similar to a sole proprietorship or partnership.
Year-Round Corporate Tax Tips
No matter the time of year, there are a handful of fundamental best practices that all corporations should follow to improve their tax and overall financial situation.
Understand Your Obligations
Every business has a unique set of tax obligations based on factors such as business structure, location, and industry, and understanding these obligations is the first step in effectively managing them. Take the time to familiarize yourself with your business’s specific requirements around income tax, sales tax, employment tax, and more.
Take a Strategic Approach
Successful corporate tax planning is not a once-a-year event; it’s a strategic, ongoing process. By integrating tax planning into the broader business strategy, your business can make tax-efficient decisions year-round. This can involve anticipating changes in tax law, monitoring shifts in business income and expenses, and regularly reassessing tax strategies. Additionally, be sure to review your average annual tax payments to check for any discrepancies.
Maintain Good Business Records
Good record-keeping is an essential part of effective tax planning. By keeping detailed and up-to-date records, corporations can track deductible expenses, prepare for audits, and make informed tax decisions. Plus, clear and comprehensive records simplify filing tax returns and dealing with tax authorities should you receive an audit.
Don’t treat your business’s tax planning to chance. At Ironwood Wealth Management, our team of seasoned tax professionals is here to help you implement the most beneficial strategies for your unique business circumstances. Connect with us today to get started.
