3 Year-End Tax-Planning Tips for Business Owners

Tax season is nearly upon us once again. Before the year winds down, many business owners can take a few steps to ensure their businesses pay no more than their fair share of taxes. These three tips typically aren’t difficult to implement — and could make a significant difference when the tax bill comes due.

1. Defer income

Deferring income into next year or accelerating expenses into this year can lower this year’s tax bill. The way in which a business defers income depends on whether it uses the cash or accrual basis of accounting. A business that uses the cash method can hold off submitting invoices, while a business using the accrual method needs to delay shipping their products or providing services. Accelerating expenses by, for instance, buying new computer equipment or stocking up on office supplies also can lower the current year’s tax bill — though the equipment must still be placed in service before year end.

Business owners considering either of these strategies need to proceed carefully. Deferring income or accelerating expenses only makes sense if a company’s tax rate is projected to be the same, or higher, in the coming year. Tax planning never should supersede business considerations.

For example, a company that’s struggling to meet payroll shouldn’t hold off on invoicing. Similarly, if a customer is on shaky financial ground, waiting to request payment may be risky, because that customer’s financial position may deteriorate in the interim. Business owners also should beware of the alternative minimum tax (AMT) and its potential impact.

2. Consider the research credit

In the past, many business owners have shied away from using the research credit — often referred to as the “research and development,” “R&D” or “research and experimentation” credit. This was partly because this tax break was considered temporary, though renewable multiple times. In addition, the research credit was applied only against regular income.

But the Protecting Americans from Tax Hikes (PATH) Act of 2015 made the research credit permanent, adding several provisions that should make it more attractive. For tax years beginning after December 31, 2015, eligible small businesses — generally, those with less than $50 million in average gross receipts for three years — can use it to offset the AMT.

The credit generally can equal 20% of the amount by which a company’s qualified research expenses exceed its base amount. This is determined, in part, by the amount the company spent on research in the past. The law also allows an alternative simplified credit.

What the law refers to as “qualified small businesses” may be able to use the research credit to offset the employer portion of Federal Insurance Contributions Act (FICA) tax. Qualified small businesses generally have less than $5 million in gross receipts and have had gross receipts for no more than five years. Up to $250,000 of the credit can be applied against the payroll tax. This also is effective for tax years beginning after December 31, 2015.

3. Establish a retirement plan

Offering a retirement plan may not only help a business attract and retain employees, but also cut its tax bills. Many companies can deduct some, or all, of their contributions to their employees’ accounts. The percentage varies with the type of retirement plan.

In addition, some small businesses can claim a credit for ordinary costs related to starting some types of retirement plans, including Simplified Employee Pensions and Savings Incentive Match Plans for Employees. The credit equals 50% of the cost to set up and administer a plan and educate employees about it, and is limited to $500 per year for each of the first three years of the plan. The business must have had 100 or fewer employees who received at least $5,000 in compensation the preceding year, and at least one participant must be a non-highly compensated employee.

Useful strategies

These are just a few of the tax-planning strategies you may want to look into when seeking to lower your tax bill this year. Understanding the ins and outs of the tax rules can give you a leg up. Consult with your Wipfli tax advisor on whether and how these and other tax-planning tactics may apply to your company’s particular circumstances.