Tax Services Director Erin Hollis reviews small business tax planning.
In the complex and ever-changing world of tax planning, one thing is clear: Business owners need help. Tax planning involves more than ensuring we don’t pay more than our fair share or – better yet – the legal minimum. Proper tax planning should involve a comprehensive analysis, involvement by the business owner to tailor the strategies to personal and corporate needs, and a systematic plan to put everything in place.
What types of credits and deductions are generally available for business owners?
- Domestic production activities deduction for manufacturers.
- Deductions for investment in equipment and other assets.
- Shifting deductions between tax years to ensure maximum benefit.
- Analysis of leasing versus purchasing vehicles and equipment.
- Deductions for loans for the purpose of growing the business.
- Research and development credits (R&D credits).
- Work opportunity credits.
- Disabled access credits.
What’s the difference between a credit and a deduction?
A credit reduces the tax, while a deduction reduces the income subject to tax. A tax deduction is subtracted from your adjusted gross income prior to calculating your federal income tax. A tax credit entitles the taxpayer to subtract the amount of the credit (dollar for dollar) from the total federal income tax bill. As such, credits are generally more valuable to taxpayers because they constitute a greater percentage of the overall tax bill.
I’ve heard business owners ask how they could ever take advantage of the R&D credit. “I employ no men in white lab coats, and I haven’t seen a Bunsen burner since high school,” they say. This is the perfect example of why business owners and – more importantly – their professionals must keep current and continually seek ways to reduce the amount of business dollars used to pay tax.
Recent federal rules have helped clarify ways in which a business can qualify and have simplified reporting requirements. Common examples include significant improvements to production line activity such as utilizing automation to replace labor-intensive tasks, the design of tools, jigs, molds and dies, and building new production facilities. In these cases, the cost of implementing the new process could be eligible for the R&D tax credit.
What business processes qualify for the manufacturing deduction?
Congress, through the American Job Creation Act of 2004, broadly defined ‘manufacturing’ so that the activity of a large number of businesses would qualify. If your business is involved in construction, engineering activities or the production of certain natural resources, this opportunity certainly should be explored further. As with most legislative graces, the Internal Revenue Code section must be interpreted and calculated correctly, as it is subject to certain limitations. Qualifying businesses, structured as flow through entities such as S-Corporations and partnerships, can provide a deduction on the owner’s personal tax return.
Why hasn’t my accountant discussed these opportunities to reduce my tax burden?
Small business owners are at a disadvantage because they generally lack the in-house financial experts larger companies employ, and their accountants are focused on tax compliance and financial statement preparation and miss applicable opportunities. Business owners should discuss the opportunities with their accountant and seek the assistance of a qualified tax attorney.