Tax Planning Process: Why It’s Not Just for the End of the Year

The end of the year is fast approaching, which means it’s tax time for your business. But a thorough tax planning process takes place year-round.

To take advantage of money-saving strategies and ensure regulatory compliance, business leaders should remain in constant contact with their advisers.

An Eye on the Future

Don’t focus solely on the taxes you pay each year to the IRS. Consider additional tax issues that may arise in the future, as well.

Part of that involves succession planning to avoid serious tax and corporate governance issues when a main owner dies.

At the beginning of the year, estimate your income and then the tax liability. Plan how much you intend to reduce or defer. Throughout the year, monitor income and expenses to make adjustments as needed.

Discuss the seasonal aspects of your industry vertical with your adviser so everyone involved is familiar with particular business cycles.

Structural Concerns

If your business is structured as an LLC, consider changing to a Subchapter S corporation. Doing so allows you to partially avoid having to pay a self-employment tax on profits taxable to the individuals. While you can make this S-corp election toward the beginning of the targeted year, you must take some related planning steps beforehand.

If your business is already structured as an S corporation, monitor profits during the year. Doing so allows you to ensure there’s a reasonable allocation to compensation for the owner/employees compared with distribution of profits.

Limited Expenses

The 2015 PATH Act permanently set the Code Section 179 expensing limit at $500,000, with a $2 million overall investment limit before phase-out (indexed to inflation for 2017 at $510,000 and $2.03 million, respectively). The PATH Act also permanently allows for the expensing of off-the-shelf computer software, as noted in a Wolters Kluwer “2016 Year-End Tax Planning” tax brief.

If your business qualifies for Code Section 179 expensing, monitor your purchases throughout the year. Keep track of whether you’re approaching the limit or have excess availability for possible year-end purchases.

Consider discussing these additional tax planning strategies with your adviser:

• Setting up a retirement plan, such as a 401(k) plan, before year-end and making a contribution to that plan.
• Reducing taxable income for the year by deferring some billing until the beginning of the next year.

Timing is everything when it comes to your tax planning process. Be proactive: Start your process now if you haven’t already, and actively position yourself for valuable tax savings throughout the year.