7 Year-End Tax Tips for Small Businesses

With the beginning of 2015, many businesses are looking at what can be done to improve their financial position for the new year. Regardless of the state your company is currently in you could end up saving on your taxes if you make the right moves now. Here are a few ideas for your small business:

1. Maintain accurate inventory counts. The holiday season is the perfect time to get rid of slow or non-selling inventory though the process of write-downs. Although you take a hit when you write-down inventory, write-downs are preferable to write-offs, and clearing out old merchandise can help your business avoid writing off large amounts of non-selling inventory.

Keeping accurate inventory counts allows you to not only make educated decisions about when to write-down inventory but also avoid extreme write-downs and costly year-end write-offs. Inventory discrepancies usually occur from receiving errors, breakage, or theft. It is important to take the time to note any obsolete or damaged inventory and reduce its valuation. You should also take time as part of your end-of-year inventory audit to correct the number, which will help accumulated errors.  Unaddressed accounting errors can lead to your business being audited or unexpected out-of-stock consequences.

2. Use section 179 correctly. This little jewel in the tax code allows small and medium-sized businesses to expense capital purchases in the year of purchase rather than depreciating over the years. This applies to material goods used in your business, including: business equipment and machines, trucks and other vehicles weighing over three tons, computers and canned software, office furniture and equipment, and inventory tracking equipment.

You can deduct the cost of paper clips in the year you buy them. Buy a paper mill, and you’ll have to deduct the cost of a ten-year period. Depreciation is the accounting procedure to partially expense a capital expenditure over a prescribed number of years. Immediate expensing is ideal, because the present value of depreciation deductions decrease with time. By the tenth year of depreciating a $10 million plant, that last $1 million dollars deduction is worth significantly less in today’s dollars. So anything that increases current expensing is good for operations.

3. Identify last-minute tax deductions. Lower your tax bill by accelerating deductions now, instead of next year. For example, many businesses don’t realize that charitable donations can be deducted. You can control the timing and supercharge the tax benefits by donating appreciated stock or property rather than cash. Or, if you’ve owned the asset for over a year, you can get a double tax benefit from the donation. Just remember that you must have a receipt, regardless of the amount.

When it comes to itemizing or not, your year-end focus should be on bunching. This is the practice of timing expenses to produce lean and fat years. So, in one year you bunch all the deductible expenses as possible with the goal of surpassing the standard-deduction amount and claim a larger write-off. In alternating years, you cut back on deductibles to hold them below the standard, and then get credit for the full standard deduction regardless of how much you actually spend. In the lean years, if you push as many deductible expenses as possible into the following year, they’ll have more value.

 4. Defer Income and make up tax shortfall with increased withholding. Yes, this sounds intense, but deferring tax is a best-kept secret of tax planning. What this means is you should accelerate deductions into the current year and defer income into next year. A few ways this can be done is by deferring bonuses, consulting income or self-employment income.

As you know, taxes are due throughout the year. Examine your withholding and estimated tax payments now while you still have time to fix the issue. If you’re in danger of an underpayment penalty, try to make up the difference through increased withholding on your salary or bonuses.

5. Research tax credits and sell stock. While this might seem surprising, tax credits are even better than deductions. Though it’s not the easiest to claim, it’s worth it if it works. If you have a fiscal year and already filed for some parts of 2014, consider amended returns.

Selling stock usually equates to capital gain, and these days that can mean up to 23% (including the 3.8% Obamacare tax) – which is pretty high. The new law allows for certain qualified small business stock to be sold, or small business can skip the tax entirely. The stock must be acquired after September 27, 2010 and before January 1, 2015. Furthermore, none of the excluded gain is subject to the alternative minimum tax.

6. Prepare for the Employer Shared Responsibility Provisions. As of January 1, 2015, employers with 50 or more full-time staff are subject to the Employer Shared Responsibility provisions under section 4980H of the Internal Revenue Code (implemented under the Affordable Care Act). Once you have more than (or the equivalent of) 50 employees, a business is classed as a large employer, which is based on the average headcount above 50 during 2014.

According to the IRS, the Shared Responsibility Provisions apply “if at least one of its full-time employees receives a premium tax credit for purchasing individual coverage on one of the new Affordable Insurance Exchanges, also called a Health Insurance Marketplace (Marketplace).”

The payment will be calculated across your entire payroll if the minimum level of coverage isn’t offered to employees.

7. Review the year’s quarterly payments and square away W9s. Many businesses make quarterly estimated tax payments and the end of the year is a good time to take stock of those payments. Compare them to your predicted year-end figures, as well as last year figures. Identify the discrepancies – are the numbers close, assuming your fourth quarter payment, which is due around mid-January of 2015? This not only prepares you for the final numbers, but it can help you budget for what might be owed. Alternatively, it can help you identify what refund you could give.

Additionally, if you contract labor for your business, each employee that has been paid $600 or more will need to complete a W9 form. Ideally, the form should be issued from the outset of the contract engagement, but if you didn’t, you can still send it at the end of the year. This way, you know what’s going in and coming out of payroll.