6 Tips When Starting A Small Business

If you’ve thought about opening your own business, this could be a great time especially if you are looking to start a home-based one. With so much information out there, choosing what ideas to follow can be confusing and overwhelming. Here are a few tips I found to be helpful. And while there’s no way to guarantee success, of course, following these tips is a great way for you to get started and help your business grow.

1. Put a plan in place. Having a business plan that takes into account as many factors as possible helps ensure that you won’t start a business that’s doomed from the beginning. Business plans should account for many factors, including products, people, the marketplace, the competition, and finances. When you put that all in one place, you’ll see what your business needs to be successful and how you’re able to meet those needs. You can also see weak areas that you might not have thought about. Be honest with yourself when creating a business plan. Check out Bplans for lots of examples and a wizard that will help you get started.

2. Know your banker. You want to establish a relationship with a banker before you ever have to ask for a loan for your small business. When you start an account, don’t just set it up with the clerk at the front counter. Ask to meet the loan officer and chat about your business, along with any services the bank might offer that could help you.

3. If you work from home, do it right. The ability to work from home is often a great way for small business owners to get started because it allows them to spend precious capital on only what’s absolutely necessary for the business. If you decide to work from home either to get started or indefinitely, try to set aside a room for a home office and decorate it appropriately. Get into a routine of waking up, getting ready for work, just like if you worked in an office building. If you need a conference room or a business mailing address, you are usually able to rent those as needed.

4. Watch your cash flow. Cash flow is the lifeblood of any company. While the goal of a business is to make a profit, it can survive for some time without profit, but a lack of cash flow is deadly. Using financial software or just a spreadsheet, create a 12-month cash flow projection so you’re able to take pre-emptive measures and avoid problems when necessary.

5. Tap your resources. Being a small business owner is daunting, but you don’t have to go it alone. Anybody starting a small business should join the local chamber of commerce, rotary club, or networking group. It is a great way to give back to the community while also meeting other business owners and taking advantage of services offered by them. Also, consider joining a local or national industry organization in your field to network and get advice on regulatory, legal, and other issues.

6. Know when to grow. While you want to grow your business, keep in mind that growth comes with bigger inventory and expense. Don’t put your business in jeopardy. Watch carefully how you spend your capital.

 

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Please contact me with any tax questions or concerns you may have. Find out how much we can help save you on this year’s tax return, please call Esta at (702) 998-0224. Network Tax Solutions – Helping you keep more of the money you make.

How to Secure a PPP Loan for Your Business

Last week, Congress replenished the Paycheck Protection Program (PPP) fund with another $310 billion. The PPP, a lifeline to small businesses struggling because of the coronavirus pandemic, is attractive to many small business owners because of its low-interest, forgivable loans. However, nearly $350 billion for the program was claimed in less than two weeks by corporate businesses. The results this round have faired better for smaller businesses. Some adjustments made to the legislation this time around were designed to steer funds to smaller businesses with fewer resources, as well as women and minority-owned businesses. According to the SBA, about half of the $90 billion and 960,000 loans have been processed by smaller lenders. There are over 5,000 banks and lenders across the country who have participated in the program. One of the most attractive features of this loan is that all or at least a portion of the loan will be forgiven if borrowers follow certain rules after receiving the loan. If you or your business still could use a loan, here is what to do to qualify.

Steps to Securing a PPP Loan

1. Get grounded in your numbers

Calculate and document these dates and numbers today, to identify the parameters you will have to work within for loan forgiveness.

• Your eight-week period (covered period) — The eight-week period in which businesses must use loan proceeds for allowable uses starts as soon as the business receives the loan. Know your start date and calculate your end date. This is the covered period for which you’ll need to provide documentation of your allowable uses.
• Your full-time equivalent headcount — The SBA will reduce the loan forgiveness by the proportion in which the FTE headcount during the covered period is less than a comparable pre-COVID-19 period. Your FTE headcount in the covered period is the average monthly FTEs employed during the eight-week period, subject to adjustment for the re-hire provisions noted below.Your pre-COVID-19 FTE headcount is either the average monthly FTEs from February 15, 2019, through June 30, 2019, or the average monthly FTEs from January 1, 2020, through February 29, 2020. You can choose which pre-COVID-19 period to use, so calculate the headcount for each period and select the lower of the two to help minimize any reduction in the forgiveness amount.

• Individual employee salary or wages — The loan forgiveness amount could also be reduced if salary or wages in the covered period are less than 75% of a pre-COVID-19 quarter. The covered period is the eight-week period following the loan origination, while the pre-COVID-19 period is the most recent full quarter before the covered period (most likely, Q1 2020 or Q4 2019). We are still awaiting guidance on how to equalize the eight-week period to a quarter’s 12-week period.
• Re-hire dates — The loan forgiveness calculations disregard FTE or salary reductions that occurred between February 15, 2020, and April 26, 2020, as long as the employer has eliminated the reduction in FTEs and/or salary by June 30, 2020.

2. Get organized and document your expenses

Knowing the numbers above is only half the battle. Applying for forgiveness with your lender will require strict documentation to prove your numbers and how you used the proceeds.

Maintain the following documentation throughout your covered eight-week period to assist in your application process:

• Payroll tax filings reported to the IRS;
• Payroll summary reports reflecting FTE headcount numbers and individual salary and wages over the eight-week period (use this to compare to numbers you calculated for the prior period);
• State income, payroll, and unemployment insurance filings; and
• Payment receipts, canceled checks, bank statements, or other documents verifying payment on covered mortgage interest, lease, or utility payments

Maintain this documentation from day one of your covered period. This is the time to insist on receipts, transparent reporting, and an organized system for document storage.

3. Develop strategies to impact the long-term outcomes for your business

While the spirit of the PPP is to give employers the means to keep as many employees employed as possible during the COVID-19 crisis, there may be circumstances where employers simply cannot maintain their pre-COVID-19 workforce. Employers faced with such circumstances may have difficulty spending the entire loan on allowable uses in the applicable eight-week period.

By way of example, a construction business that applied for the maximum PPP loan may be unable to keep its hourly employees working full time because many jobs have been canceled or delayed due to the outbreak. Or, in the case of restaurants, many employers have already furloughed their employees, and, while they can bring them back on their payroll to qualify for forgiveness, it may not make sense to do so for restaurants that are not running at full capacity within eight weeks. In addition, it may be difficult to get furloughed employees to come back, because some furloughed employees may actually be earning more from recently expanded unemployment benefits than they would earn if they came back to work.

In all of these situations, employers may have difficulty spending the full loan proceeds during the eight-week period and 75% of their loan amount on payroll during that time with a reduced workforce. Note that loan forgiveness is not all or nothing. If you have not met all of the requirements for loan forgiveness, a portion of the loan will be forgiven based on what you were able to spend on allowable uses in the period.

This is where different strategies can come into play. In some situations, it may be more beneficial to operate with a reduced workforce and convert a portion of the loan to a two-year, low-interest loan or immediately repay any unforgiven portion of the loan without penalty. In other situations, it may be a better strategy to push more payroll-related expenses, such as employer 401(k) contributions or bonuses, into the eight-week period to meet the 75% payroll cost threshold. Employers should think through the various available strategies to help enhance loan forgiveness, while also balancing the near-term needs of employees and long-term needs of the business.

Bringing it all together

During a time when so much is outside our control, understanding what you can control as it relates to the PPP loan will help prepare your business for enhancing loan forgiveness. Here’s what you can control now: calculate the dates and numbers impacting your forgiveness calculation, maintain your documentation, and model out various strategies that demonstrate 100% forgiveness versus a sliding scale of forgiveness. This model should incorporate the numbers you calculated above, along with an updated cash flow forecast. This will enable you to see what levers you can pull to impact longer-term outcomes for your business during and beyond your eight-week covered period.

Please visit the sba.gov website for more information and to get started on the loan application.

Save Money By Paying Fewer Taxes

For help on business and other tax-related questions, or to find out much we can help you save on this year’s tax return, please call Esta at (702) 998-0224. Network Tax Solutions – Helping you keep more of the money you make.

Article Sources: CLAconnect.com

 

Retirement reforms in the CARES Act

 

The Coronavirus Aid, Relief, and Economic Security Act, (CARES Act, HR 748), signed into law March 27, is a $2.2 trillion stimulus package geared towards providing relief for businesses impacted by the COVID-19 pandemic. However, it does contain provisions that change rules about retirement plans for 2020. If you are retired or near retirement, here’s what you should know about.

Temporary Waiver of RMDs

Under §401(a)(9), a retirement plan or IRA owner must take a required minimum distribution (RMD) annually once the owner reaches age 72. However, for the calendar year 2020, CARES waives the required minimum distribution rules for certain defined contribution plans. The wavier applies to all required minimum distributions that would have been required in 2020. This includes the first RMD, which individuals may have delayed from 2019 until April 1, 2020.

Example. John, who is 74 years of age, has an IRA that had a balance of $1,000,000 on Dec. 31, 2019. Using prior law, John’s RMD for 2020 is $42,017.  Currently, his IRA is worth $500,000 and he doesn’t want to sell stock inside of the IRA account to take out an “inflated” RMD amount. CARES allows John to waive his 2020 RMD.

Application. According to CARES, RMD rules do not apply in 2020 to:

1. defined-contribution plans (§403(a) or §403(b)),
2. defined-contribution plans that are eligible deferred compensation plans under 457(b) and maintained by an employer, or
3. individual retirement plans (§401(a)(9)(I)(i)).

Also, the RMD rules do not apply to any distribution required to be made in 2020 because of:

1. a required beginning date occurring in 2020, and
2. such distribution not having been made before 2020.

Example. Jill turned 70 ½ in January 2019.  She chose to take her first RMD on April 1, 2020.  Because of CARES, Jill is not required to take an RMD, even this one, in 2020.

Tax practitioner planning. 80% of account owners drew more than their RMD before the pandemic. Clients may need to take more money from their pension accounts, not less.

Remind your clients.  They may take a distribution from their IRA or pension plan in 2020. The new law simply does not require them to take a distribution in 2020.

Waiver of 10% Penalty for Coronavirus-related Distribution

Consistent with previous disaster-related relief provisions, CARES waives the §72(t) 10% early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for coronavirus-related purposes made on or after Jan. 1, 2020 and before Dec. 31, 2020. Income attributable to such distributions is subject to tax over three years.

Repayments of Coronavirus-related Distributions. A coronavirus-related distribution may, at any time during the 3 years beginning on the day after the date such coronavirus-related distribution was received, be repaid in one or more contributions to an eligible retirement plan in which the qualified individual is a beneficiary. Such repayments will be treated as eligible trustee to trustee rollovers made within 60 days of distribution.

Coronavirus-related distribution. A coronavirus-related distribution is one made to an individual:

1. who is diagnosed with COVID-19,
2. whose spouse or dependent is diagnosed with COVID-19, or
3. who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury

Qualified Individual. A qualified individual is any individual:

1. diagnosed with the virus SARS-CoV-2 or with coronavirus COVID-19 by a test approved by the CDC,
2. whose spouse or §151 defined dependent is similarly diagnosed, or
3. experiencing adverse financial consequences as a result of being:
   • quarantined,
   • furloughed or laid off or having work hours reduced due to such virus or disease, or
   • unable to work due to lack of child care due to such virus or disease, the closing or reduction of hours in a business owned or operated by the individual due to such virus or disease.

Note. The retirement plan administrator can rely on an employee’s certification that the employee satisfies the conditions of the item (3) above.

Pension Plan Loans

The §4975(d) limit on retirement plan loans from a qualified employer plan made to qualified individuals during the 180 days beginning on March 27, 2020, is increased from $50,000 to $100,000 000 (or, if less, the individual’s nonforfeitable benefit).  If the due date of a loan occurs between March 27, 2020, and Dec. 31, 2020, it will be delayed for one year.

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Please contact me with any tax questions or concerns you may have. Find out how much we can help save you on this year’s tax return, please call Esta at (702) 998-0224. Network Tax Solutions – Helping you keep more of the money you make.

 

Article Sources: E-tax alerts Western CPE

The CARES Act Passed! Here’s a Breakdown of the Economic Relief Plan

On Friday the President signed the approved Coronavirus Aid, Relief and Economic Security (CARES) Act, a $2.2 trillion dollar aid package that helps provide economic relief to the American economy due to the devastating impact of the COVID-19 pandemic. The CARES Act builds on the two former pieces of legislation by providing more robust support to both individuals and businesses, including changes to tax policy. This massive economic aid bill will include:

• Expanded unemployment insurance (UI) for workers, including a $600 per week increase in benefits for up to four months and federal funding of UI benefits provided to those not usually eligible for UI, such as the self-employed, independent contractors, and those with limited work history. The federal government will provide temporary full funding of the first week of regular unemployment for states with no waiting period and extend UI benefits for an additional 13 weeks through December 31, 2020, after state UI benefits end.

• $350 billion allocated for the Paycheck Protection Program, which is meant to help small businesses (fewer than 500 employees) impacted by the pandemic and economic downturn to make payroll and cover other expenses from February 15 to June 30. Notably, small businesses may take out loans up to $10 million—limited to a formula tied to payroll costs—and can cover employees making up to $100,000 per year.

• Recovery Rebate for individual taxpayers. The bill would provide a $1,200 refundable tax credit for individuals ($2,400 for joint taxpayers). Additionally, taxpayers with children will receive a flat $500 for each child. That means a family of four earning less than $150,000 can expect $3,400. Individuals making more than $99,000 and couples filing jointly making more than $198,000 would not qualify. Rebate payments are based on either your 2018 or 2019 tax filings, and would not be counted as taxable income for recipients, as the rebate is a credit against tax liability and is refundable for taxpayers with no tax liability to offset.

• Other Individual Tax Benefits include:
  •  a $300 partial above-the-line charitable contribution for filers taking the standard deduction and expands the limit on charitable contributions for itemizers.
  • Waives the 10 percent early withdrawal penalty on retirement account distributions for taxpayers facing virus-related challenges. Withdrawn amounts are taxable over three years, but taxpayers can recontribute the withdrawn funds into their retirement accounts for three years without affecting retirement account caps. Eligible retirement accounts include individual retirement accounts (IRAs), 401Ks and other qualified trusts, certain deferred compensation plans, and qualified annuities. The bill also waives required minimum distribution rules for certain retirement plans in the calendar year 2020.
  • Certain employer payments of student loans on behalf of employees are excluded from taxable income. Employers may contribute up to $5,250 annually toward student loans, and the payments would be excluded from an employee’s income.
• Business Tax Provisions include:
  • Employers are eligible for a 50 percent refundable payroll tax credit on wages paid up to $10,000 during the crisis. It would be available to employers whose businesses were disrupted due to virus-related shutdowns and firms experiencing a decrease in gross receipts of 50 percent or more when compared to the same quarter last year. The credit is available for employees retained but not currently working due to the crisis for firms with more than 100 employees, and for all employee wages for firms with 100 or fewer employees.
  • Forgivable loans: There is $350 billion allocated for the Small Business Administration to provide loans of up to $10 million per business. Any portion of that loan used to maintain payroll, keep workers on the books or pay for rent, mortgage, and existing debt could be forgiven, provided workers stay employed through the end of June.
  • Relief for existing loans: There is $17 billion to cover six months of payments for small businesses already using SBA loans
  • Employer-side Social Security payroll tax payments may be delayed until January 1, 2021, with 50 percent owed on December 31, 2021, and the other half owed on December 31, 2022. The Social Security Trust Fund will be backfilled by general revenue in the interim period.
  • Firms may take net operating losses (NOLs) earned in 2018, 2019, or 2020 and carry back those losses five years. The NOL limit of 80 percent of taxable income is also suspended, so firms may use NOLs they have to fully offset their taxable income.
  • Firms with tax credit carryforwards and previous alternative minimum tax (AMT) liability can claim larger refundable tax credits than they otherwise could.
  • The net interest deduction limitation, which currently limits businesses’ ability to deduct interest paid on their tax returns to 30 percent of earnings before interest, tax, depreciation, and amortization (EBITDA), has been expanded to 50 percent of EBITDA for 2019 and 2020. This will help businesses increase liquidity if they have debt or must take on more debt during the crisis.
  • Aviation excise taxes are suspended until January 1, 2021. We estimate this will reduce federal revenue by about $8 billion in 2020.

• $454 billion in emergency lending to businesses, states, and cities through the U.S. Treasury’s Exchange Stabilization Fund. Additionally, this includes $25 billion in lending for airlines, $4 billion in lending for air cargo firms, and $17 billion in lending for firms deemed critical to U.S. national security. Firms taking loans must not engage in stock buybacks for the duration of the loan plus one year and must retain at least 90 percent of its employment level as of March 24, 2020. Loans also come with terms limiting employee compensation and severance pay for firms taking loans. Emergency lending will be overseen by a Congressional Oversight Commission and a Special Inspector General.

• Health provisions to address the coronavirus crisis, including provisions addressing supply shortages, coverage of diagnostic testing for the virus, support for health-care providers, improving telehealth service access and flexibility, encouragement for the creation of drugs to treat the virus, strengthening related Medicare and Medicaid provisions, and providing support for educational institutions.

• $150 billion in a Coronavirus Relief Fund for state and city government expenditures incurred due to dealing with the coronavirus public health emergency. The fund would be allocated by population proportions, with a minimum of $1.25 billion for each state.

 

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For answers to any tax-related questions or to find out much we can help you save on this year’s tax return, please call Esta at (702) 998-0224. Network Tax Solutions – Helping you keep more of the money you make.

 

Article Sources: Tax Foundation, NPR, Whitehouse.gov

Ready to File? Quick Review of Taxes in 2020

 

Today you may be working from home, adjusting your lifestyle and business needs, or simply trying to create a sense of normalcy as the world navigates this strange time. Our thoughts are with those most affected by the Coronavirus and the health, safety, and happiness of our community, customers, and ‘tax family’ is of vital importance to us. We have been serving our customers for more than 40 years and we are committed to continuing to provide you with exceptional tax services and help support your business or profession. We are here for you. Please stay healthy! 

Dear Friends,

There’s an old saying among tax professionals: “Never  let the tax tail wag the economic dog.”  While that adage still holds true, 2019 has been a unique tax year because of the many changes occurring. So, while we still want to put economic considerations first, tax considerations are more important than ever.  Here are some of the changes and issues you need to know about.

» IMPORTANT: The IRS is providing special tax relief to individuals and businesses in response to the COVID-19 Outbreak. The deadline for both filing and payments has been extended 90 days to JULY 15, 2020. Each State will issue its own filing and payment deadlines. [article link]

1. W-2s and 1099s MUST be have been filed by January 31, 2020, for the year 2019.
2. The 30% credit for installing solar property on personal use properties is reduced to 26% for property installed after  December 31, 2019.
3. California introduced penalties for failure to carry health insurance starting in The Federal government has repealed the penalty.

4. The Tax Cuts and Jobs Act (TCJA) of 2017 provides a deduction of up to 20% (199A) on rental real estate when certain requirements are met.
5. We must report all overseas assets owned by businesses and individuals.
6. To help avoid fraud in 2020, it is important to write the complete date on all checks and important documents such as 1/8/2020. All 4 digits are needed for the year.

As mandated by Federal law, all tax returns prepared by this office will be electronically filed.  Both the IRS and all State Taxing Agencies require you to sign an approval form. Your returns will  NOT be filed until we are in receipt of all necessary forms and PAYMENT of your invoice.

Please drop off your completed organizer to your tax appointment or if you prefer, you can return the filled-in organizer either by mail or electronically (e-mail). I am now taking appointments through June 30th. Please don’t hesitate to call  (702) 998-0224 or email Esta at info@networktaxsolutions.com if you have any questions or would like to set up an appointment.

Although things look very dire at the moment, let’s only hope we can overcome this terrible pandemic sooner than later.  I encourage you all to continue to show good prudence, patience, and compassion Together, we will get through this. Thank you for choosing  Network Tax Solutions, “Helping You Keep More of the Money You Make.”

Financially yours,

Esta Klatzkin, EA

Founder

12 IMPORTANT THINGS TO KNOW ABOUT SOCIAL SECURITY

 

1. SOCIAL SECURITY IS NOT GOING BANKRUPT

Social Security trust funds are near an all-time high.  The Trust Fund Reserves are worth about $2.89 trillion today.  As more boomers retire, the ratio of workers to Social Security recipients is changing.  The program will need to dip into its reserves to pay full benefits from now on.  It is now forecast that the trust fund reserves could be exhausted in 2034.  Social Security still won’t be bankrupt.  The program will then pay benefits at a rate of 79 percent of what recipients expected to receive.  The goal is to keep benefits at their current level.

2. CONGRESS PROBABLY WILL NOT TAKE UP SOCIAL SECURITY REFORM ANYTIME SOON

Control of Congress after the 2018 elections will play a key role in how Social Security’s funding is addressed.  Since Social Security is so important, we need to be really thoughtful and deliberate about how to make a change.  Bipartisan support will be required for Congress to make any effort to reform Social Security.

3. SOME IDEAS TO REFORM FUNDING ARE STARTING UP

One proposal is to either raise or eliminate the wage cap on how much income is subject to the Social Security payroll tax.  The cap for 2019 is $132,900.  Other options are either raising the percentage rate of the payroll tax or raising the age for full retirement benefits.

4. LAWMAKERS DO NOT RAID THE TRUST FUND

Money remaining after benefits are paid is invested directly into U.S. Treasury securities.  The government can use the money from those securities, but it has to pay the money back with interest.

5. MANY BELIEVE IT CAN BE RUN BETTER

With the rapid increase in the number of retirees, the agency is struggling to keep up. Over 10,000 people are turning 65 every day.  Average wait times at field offices has increased by 32% since 2010.  Something needs to be done.

6. YOUR SOCIAL SECURITY BENEFITS CAN BE TAXED

Single filers whose combined annual income exceeds $34,000 might pay income tax on up to 85% of their Social Security benefits; couples filing jointly may pay tax on up to 85% if their combined income tops $44,000.

7. SOCIAL SECURITY IS NOT MEANT TO BE A RETIREE’S SOLE SOURCE OF INCOME

The SSA says the program’s retirement benefits will replace about 40 percent of your preretirement wages.  Fifty percent say their families depend on Social Security for at least half of their income.  Twenty-six percent have families trying to live on almost all of their retirement income.

8. THE PURCHASING POWER OF SOCIAL SECURITY IS DIMINISHING

Every year, the SSA issues a cost of living adjustment (COLA) to keep up with inflation.  Medical costs for older Americans has increased faster than the COLA has adjusted.  This is another area that needs to be addressed.

9. YOU CAN WORK AND GET SOCIAL SECURITY

The agency will withhold some of your benefits if you are under the full retirement age and your earned wages exceed a certain limit.  In 2019, the threshold on your earnings will be $17,640.  The government will temporarily withhold $1 from your benefit for every $2 earned over the cap.  Once you reach full retirement age, you can work as much as you like and your benefits won’t be reduced.

10. SOCIAL SECURITY HAS GONE DIGITAL

The U.S. Treasury Department no longer sends paper checks in favor of electronic payments.  The SSA has an online portal called My Social Security where you can track your benefits.

11. SOCIAL SECURITY IS NOT JUST A RETIREMENT PROGRAM

There are 4 main types of Social Security benefits:  retirement, disability, dependent and survivor.  When filing for benefits, you should make sure to ask about your eligibility for other benefits.  If someone in your family dies, you should inform SSA of the death and ask if you or other family members are now eligible for an additional survivor or dependent benefits.

12. MOST PEOPLE GET BACK MORE THAN THEY PUT IN

Generally, married couples are more likely to get back more than they contributed than single people.  Both low-income and high-income people may receive more dollars from the program over a lifetime than the amount of money they contributed to it.

 

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Please contact me with any tax questions or concerns you may have. Find out how much we can help save you on this year’s tax return, please call Esta at (702) 998-0224. Network Tax Solutions – Helping you keep more of the money you make.

10 Tips on How to Reduce Taxable Income for Small Businesses

 

Small business taxes can be confusing and, as a small business owner, you likely have several questions: How much do I pay? Why do I have to pay this amount? How can I reduce taxable income?

Understanding how to reduce taxable income legitimately and avoid pitfalls is important and can have great returns.

Understanding How to Save Tax in 2020

Unfortunately, many small business owners overpay on their taxes by missing out on certain deductions or managing their businesses and retirement savings in a way that is not efficient for tax purposes. Considering the U.S. tax code is roughly 70,000 pages long, it’s understandable why small business owners and even accountants have trouble navigating it.

There are many complexities to deal with when trying to minimize your tax bill. But, with the right strategies, you can save money on taxes while making your life easier during tax season.

Here are 10 tips to reduce taxable income for small businesses.

1. Keep an Eye on Adjusted Gross Income

Many tax breaks, limitations, and additional taxes tee off of adjusted gross income (AGI) or modified adjusted gross income (MAGI). For example, you’ll avoid the 0.9% additional Medicare tax on earned income if your AGI does not exceed $200,000 (single) or $250,000 (married filing jointly). Despite other tax cuts that were part of the Tax Cuts and Jobs Act of 2017, this tax, which was intended to help pay for Obamacare, is still in effect.

2. Reimburse Using an Accountable

If you reimburse employees for travel, entertainment, tools, or other costs, consider doing so using a plan that meets IRS requirements. This is called an accountable plan. With this plan, the business deducts the expenses but does not report the reimbursements as income to employees, potentially saving the company employment taxes and lowering taxable income overall.

Also, if your company does not already offer an accountable plan for employee reimbursement, your employees will likely soon be asking you for one. Under the new tax law, employees cannot deduct miscellaneous unreimbursed employee expenses. Giving your employees an accountable plan for reimbursements can help your employees save money on taxes, as well as helping the business. It’s a win-win.

3. Make Smart Tax Elections

There are several ways for how to reduce taxable income by being strategic about your business expenditures. For example, you are allowed to deduct the cost of acquiring machinery and equipment in full, upfront, up to a set dollar amount. In 2018 that expensing cap increased to $1 million per the new tax law.

However, if your business is just starting up or is not yet profitable, you can ask your accountant about depreciation for these items. It might be better for your overall tax situation if you can spread out the value of the purchases across your future tax years instead of deducting the full purchase price all at once. This can help produce deductions for future years when these assets may be more valuable to you.

For example, if you are in the 15% tax bracket now but expect to be in the 35% bracket in the future due to increased profitability, a $10,000 deduction would have you currently saving only $1,500 in taxes. Depreciation over five or seven years (depending on the type of item) would produce total savings in the 35% bracket of $3,500, or $2,000 more. Other options to ask your accountant about: Deducting vehicle expenses based on actual costs or the IRS mileage allowance (currently 58 cents per mile)

• Deducting vehicle expenses based on actual costs or the IRS mileage allowance. Beginning in January 2019, it became 58 cents per mile.
• Deducting home office expenses based on actual costs or the IRS simplified rate. The current standard deduction is $5 per square foot up to 300 square feet of space.
• Claiming disaster losses on prior-year returns rather than on the return for the year in which the disaster occurs.

Another method for how to save tax is that in addition to claiming disaster losses, you can also consider deducting the business insurance expenses that you pay every year. IRS form 1040 can help you determine your business insurance deduction. The following is a list of different business insurance coverages that you can deduct:

• General Liability Insurance
• Workers’ Compensation Insurance
• Commercial Auto Insurance
• Business Interruption Insurance

Because unscrupulous people sometimes form small businesses as a fraudulent means to cheat on taxes, the IRS has begun to more heavily scrutinize small business filings to make sure the companies are legitimate businesses, and not just tax shelters. Small businesses that are registered as the following should consider seeking professional assistance in learning what insurance premiums can be deducted as legitimate business expenses:

• Single person LLCs
• Sole proprietorships
• Separate entities

4. Don’t Overlook Carryovers

Certain deductions and credits have limitations that can prevent you from using them fully in the current year but could permit a carryover to future years and carryovers are a way to reduce taxable income. Keep track of carryovers so that you won’t forget to use them in future years. This is done automatically by most tax preparation programs and should be done by tax professionals you may use. Examples:

• Capital losses
• Charitable contribution deductions
• General business credits
• Home office deduction
• Net operating losses (limited to 80% of taxable income)

5. Use Tax-Free Ways to Extract Income

Salary, bonuses, and distributions of your share of business profits are taxable. However, there are ways in which you can possibly benefit from your business’s success without triggering the tax. Consider talking to your accountant about:

• Tax-free fringe benefits, including medical coverage, health savings accounts, and retirement plans.
• Loans by the business to you on a no- or low-interest basis. If the loan interest is below IRS-set rates (also known as Applicable Federal Rates), the business may have to report interest from this arrangement. But with interest rates low, this isn’t too costly these days.

Learn more about the types of income that are tax-free.

6. Consider Abandoning vs Selling Property

If the property has no value to the business, talk to your accountant about the benefits of abandoning it rather than selling it for a nominal amount. This could allow the business to take an ordinary loss on the property, which is fully deductible, rather than treating the loss as a capital loss, which is subject to limitations.

7. Use Fringe Employee Benefits Plans

Additional wages trigger employment tax costs for the business. But if the business pays for certain fringe benefits for employees, these taxes can be avoided. Tax-exempt benefits you can consider offering your employees include:

• Employer-sponsored health insurance
• Long-term care insurance
• Group term life insurance
• Disability insurance
• Educational assistance
• Dependent care assistance
• Transportation benefits
• Meals provided for employee convenience

More details on the tax benefits of fringe benefits plans are available in IRS Publication 15-B (2019), Employer’s Tax Guide to Fringe Benefits.

8. Shelter Profits in Retirement Plans

It’s actually quite easy to set up a simple small business retirement plan for your employees. An employer-sponsored 401(k) or a similar tax-deferred retirement plan will allow employees to make tax-deductible contributions to save for their future. With a tax-deferred retirement plan like a 401(k) or traditional IRA, the employee doesn’t pay taxes currently on contributions to retirement plans. Instead, the retirement savings funds grow on a tax-deferred basis. This means distributions are taxable when taken in the future (when the employee may be in a lower tax bracket).

There are several retirement plan choices. The one to use depends on your situation. Remember that if you have employees, the business must cover them on a nondiscriminatory basis (owners and management cannot be favored). But a plan such as a 401(k) shifts most or all of the cost of savings to employees while giving them choice and flexibility in planning for retirement. Many small businesses prefer this over a defined benefit pension plan where more of the burdens are on the employer.

Also, setting up a retirement plan is not just good for employees — it’s good for your company. That’s because employer contributions to an employee retirement plan are tax-deductible and you might qualify for a tax credit for setting up your employee retirement plan.

9. Do Year-End Planning

While tax planning is a year-round activity, you can achieve dramatic savings by taking action at the end of the year. There are several strategies that can help you lower your taxable income just before the end of the year.

• Delay billing for unpaid work until payment is received. If your business uses cash basis accounting, you can delay billing for work done at the end of the year until payment is received in the following year. This lowers your tax liability in the current year. Just don’t defer income if you are having a cash shortfall or have concerns about the customer’s ability to pay.
• Purchase fixed assets and claim immediate depreciation. You can lower taxable income in the current year by claiming a portion of depreciation on recently purchased fixed assets. It is also important to revalue your assets that are listed in your books. This can help lower your net profit as you increase claimed depreciation. If an asset has no use or value, ask your accountant if you could delete it.
• Write off bad debt. If you have an account receivable with a customer who is unlikely to pay, then you might be able to write this off as an uncollectible debt. This is known as a Bad Debt Deduction. It will be considered a loss and will allow you to lower your profits and taxes. However, to qualify for this deduction, you must have previously included the bad debt in your business income. You must also have intended the transaction to be a loan, such as a loan to clients and suppliers, credit sales to customers, or business-loan guarantees.
• File and submit your taxes on time. When it comes to end-of-year planning, it’s best to have your taxes filed and submitted on time. There are separate penalties that apply for late filing and for late payment, so you should file on time even if you’ll need more time to pay.

Even if “last year” is over, you can still make some tax moves within the first quarter of the new year to help save money on “last year’s” taxes. This is especially important at the start of 2020 when so many big changes are underway in the tax law that could potentially help you save money on taxes. You can make prior-year tax-deductible contributions to all of these plans until the 2019 tax filing deadline of April 15, 2020.

10. Restructure Your Business

If you’re doing business as a sole proprietorship or partnership, it may be time to pick a new business structure. Many small business owners choose to do business as an LLC (Limited Liability Company). Why? Because it’s considered a “pass-through entity” that offers significant flexibility for the tax treatment of your business income.

For example, an LLC can elect to be taxed as an S corporation. The business owner pays themselves a reasonable salary (which is subject to FICA taxes just like any employee’s salary). Then the rest of the LLC’s income passes through as a “distribution” of business income that is not subject to FICA taxes. Operating as an LLC and filing taxes as an S corporation can help you save significant money at tax time. It would help you avoid owing self-employment tax on a large portion of your income.

If no such election is made and the LLC does not pay taxes as an S corporation then the LLC owner has to pay self-employment tax on all the business’s net earnings. This is the equivalent of the employer’s and employee’s share of FICA. For example, say the LLC has profits of $250,000 and it would be reasonable to pay the owner a salary of $100,000. Without an election, the owner pays self-employment tax on $250,000. With the election, the business and the owner each pay FICA only on $100,000. This can add up to thousands of dollars in tax savings.

As of the 2018 tax year, one other advantage to structuring your business as a pass-through entity began. Owners of LLCs and other pass-through entities are now able to deduct 20% of their business income on their individual tax returns.

There will be some limitations and exceptions to this pass-through deduction. For example, the deduction is phased out for owners of service businesses with a taxable income of $315,000 or more for married filing jointly/$157,500 for single filers.

There are some additional complexities to the pass-through deduction depending on what type of business you operate. For example, the maximum deduction depends on your company’s total wages and capital investment. So be sure to talk with your accountant about what the new tax law means for you.

Final Thoughts on How to Reduce Taxable Income

When it comes to how to save tax, you can reduce the amount of taxes you pay if you take advantage of breaks and opportunities that are out there. It’s up to you (and your tax advisor) to discover new ways to lower taxes for your small business. This is especially important as you enter 2020. The moves you make now can potentially save you significant amounts of money this year and into the future.

As Published in the Hartford Small Biz Ahead Newsletter