April
It may seem counterintuitive to talk about taxes a couple of days after tax day, but I figure now is the perfect time about taxes. Instead of offering advice a week before taxes are due—when it is already too late to do anything about it—I think it is better to wait and give the insanity a few days to settle before throwing everyone back into a tax frenzy. While some of these ideas may not apply to you right now, they are things to consider for the future.
Deduct from the Get-go
Taxes are one of those necessary evils, but that does not mean you cannot try to keep some of it from going out of your pocket and into Uncle Sam’s. As a small business owner, there are some ways to reduce the taxes you will pay on some of your income and deduct some of the costs of business.
In some cases, it is all about timing. If your business is doing alright, and you are not being kept afloat by each customer payment, you can reduce the current year’s taxes by holding off and sending out invoices on the last day of the year. The payments will be received during the next tax year, which means you won’t have to pay for them on this year. You can also cash in on some deductions during the current tax year if by choosing to pay them before the year ends.
If you fall into the upper tax brackets, then you can offset some of the taxes by moving some of your income into dividends. Dividends are taxed at a lower rate (usually 15%); therefore you can reduce the amount of money that is taxed at your normal income rate.
Everyone likes deductions and tax credits, so here are some that might apply for your business. There are tax credits available to any business who decides to go green and use energy star products. On top of that, they are also better for the environment and easier on your wallet. While conserving resources may save you money, you can also get deductions on things that consume them. If get a new company car, then you can write $12,000 the first year and $25,000 if it is a pick-up or SUV.
The Family of Business
The agricultural revolution brought about many changes, including the beginnings of the “family business”. Fast forward 10,000 years, and people are still torturing themselves by employing their loved ones. Next time you consider hiring (or firing) your kids, you should know that there are some tax advantages to having them work for you. You avoid having to pay Medicare and Social Security taxes, and whatever you pay them is deductible.
On the flip side, your children’s tax rate is the same as yours until they are considered independents, so your higher income could be doing them a disservice. To offset some of this, they can invest in tax-free municipal bonds. By doing so, they can hold onto them until they are on their own and their tax rate is set to their own income.
Parents will almost always try to do what they can to help their kids (no matter how old) get ahead. If you gift money to your kids, try to keep it below the $13,000 mark. This way you get to miss out on paying a gift tax.
On a graver note, you should plan for your own demise. While it is not pleasant to think about, it is better for your family if you have all your finances in order before you embark on your last great adventure. If you know the end is coming, you should sell your home to your children before you pass away, instead of leaving it to them in your will. This way, they avoid having to pay a large inheritance tax.
For the sake of everyone’s vision and economic welfare, I will put the fine print in 12-point font. The IRS takes tax evasion very seriously, so you should always consult with an accountant before making any decisions regarding your taxes, income, and assets.
