Tax experts, including myself, often write in generalities about tax actions that small business owners should take. The general advice may be fine for most small business owners but not necessarily for you.
Here are some ways to adapt the general tax advice for your situation so you optimize your tax results.
One of the most common deductions for small business owners is for business driving of a personal car or truck. The write-off can be substantial, but requires good recordkeeping.
General advice: When taking a deduction for business driving of a personal vehicle, figure the write-off using the actual method (the actual costs for business driving) and the IRS allowance (54¢ per mile in 2016) so you can then use the greater deduction.
Customization: If you don’t want to keep track of your receipts throughout the year, plan to rely on the IRS allowance. You still need a record of the miles driven for business. This could cost you in deductions, but clearly saves you the time you’d spend in keeping receipts and adding up costs. If you own the vehicle, you don’t have to figure depreciation and if you lease, you don’t have to add back an inclusion amount.
Find out more about these write-off options for business driving in IRS Publication 463.
When you buy a capital asset, such as a building or machine, for tax purposes you recover your cost using depreciation or other write-off allowance.
General advice: Use the allowance that provides the greatest write-off for the current year. This may be accelerated depreciation, first-year expensing (Section 179 deduction), or bonus depreciation (or a combination of them).
Customization: You have all of these write-off options for a reason: it’s up to you to choose the one(s) best suited to your situation. For example, if you’re in the start-up phase and only have modest revenues, big write-offs don’t produce big tax savings. You can effectively “save” deductions for the future, when they’ll be more valuable to you, by foregoing quick deductions for depreciation. This spreads your deductions over a number of years. In those years, you get write-offs even though you didn’t make any additional capital investments.
Find out more about these write-off options in IRS Publication 946.
You can save for your retirement while sheltering profits by making deductible contributions to a qualified retirement plan.
General advice: Select the qualified retirement plan that enables the greatest contributions, such as a 401(k) plan or a defined benefit plan.
Customization: Choose a plan that meets all of your objectives — tax, financial, business. For example, if you’re a small business looking to provide a retirement savings option for your staff but don’t have a lot of money to do it, you may want to use a SIMPLE plan, which limits your required contributions for employees. Or, you may want a plan that is uncomplicated to operate and avoids the need for annual filings with the Department of Labor; a SEP may fit the bill for these objectives.
If you’re saving through a personal retirement plan, instead of making a deductible IRA contribution, consider instead a Roth IRA (assuming eligibility). You’ll forego the upfront deduction for the opportunity to build tax-free income in the Roth IRA.
Net operating losses
If you have losses that can’t be used currently, you can carryback a net operating loss and use it as an offset for the two prior years (longer carrybacks apply to special situations).
General advice: Take advantage of the carryback to obtain a tax refund from the prior years. The carryback offsets income in those years, reducing tax liability and generating a tax refund.
Customization: You may want to elect to forego the carryback and simply use it in the future. It can be carried forward for up to 20 years. While a refund is nice and provides immediate cash for your business, a future loss deduction can produce even greater tax savings if you’re in a higher tax bracket than you were in a carryback year.
You can find about net operating losses in IRS Publication 536.
Tax planning now
There are still many months left in 2016 to determine the actions that you can take to help your business while optimizing your tax results. To know what’s best for your situation, consider meeting with a CPA to review your income and expenses to date and to project business activity for the remainder of the year. Together you can work out a customized tax plan.