2016 Comprehensive Checklist to Minimize Your Tax Liability
Colorado Business CPA, LLC
November 2, 2016
With 2016 calendar year almost gone, now it is time to think about the bottom line of your business and its tax consequences. When we work with our clients as well as to monitor our company’s book, the very first thing we do is to run a comparison of financial statements with the last year. This gives us a clear picture of how you did in comparison to the previous year, and be able to predict your current year tax situation. No matter what your numbers are, it is always wise to have at least 3-4 months of reserve of cash and not to take all the money out of your company as shareholder’s distributions before knowing what your tax liability will be. Also, having cash makes tax planning process much easier.
So, let’s go over some tax planning strategies, checklists and questions to make this year as painless as possible on your tax liability. Of course, keep in mind that if you regularly make estimated tax payments and submit your payroll withholdings, then you are in much better place than you could be, but there is still room for improvement with the tips below.
Let’s discuss some tax planning tips:
Again, having cash available makes all the difference in tax planning process. If you have extra cash, you can prepay some expenses in 2016. Expenses such as professional fees, rent, insurance, and bonuses to employees.
Buying fixed assets, such as computers, office furniture and other equipment would help if your business make income and may qualify your business for a Sec. 179 business depreciation tax deduction.
If you pay to subcontractors and other professionals, make sure to issue 1099-Misc form to them, if more than $600 was paid in 2016 per year for the entire year. You can collect information used in the 1099- Misc. form by asking your subcontractors to fill out form W-9.
If you are not sure whether your people need to be on payroll or just 1099-Misc subcontractors, consulting with tax advisor would be wise.
If you are an S-corporation and have business net income, you have to pay yourself a reasonable salary and subject that to self-employment taxes. The good news is that you can also make Federal and State income tax payments if you have not made any estimated tax payments. Tax Payments made with payroll are treated by IRS as payments were made equally throughout the year in equally installment payments. Thus, avoiding failure to make estimated tax payments penalty.
If your business is taxed as an LLC and reported to Schedule C of your individual tax return, and your business net income is over $30,000, perhaps changing your business entity into an S-corporation would be a good idea. Our office, indeed will be able to file a late S-corporation election with IRS for you, if needed, and run a payroll for you, to comply with all the rules of the S-corporation.
Make sure your shareholders health insurance is reported correctly on your W-2, so you need to notify your payroll agency in December. By reporting your self-employed health insurance correctly, you will be able to deduct it as an adjustment to your gross income verses Schedule A.
Have you opened an HSA account? Contributions to Health Savings Account can be made for 2016 by April 15th 2017; however, the account must be open by December 31st. Also,make sure your health insurance plan is high deductible and that you do qualify for HSA account.
Please keep in mind that retirement plan contributions are also great options for tax saving strategies. You have various options such as Traditional IRAs, Roth IRAs (not tax deductible), SEP, Simple IRAs and 401Ks. Make sure to discuss these options with your tax consultant for what option is the best for you.
If this year you had a very low income, perhaps conversions from Traditional to Roth IRAs would be a good year for you. Since conversions generate additional tax liability, you might want to do it when you are in the low tax bracket.
If you operate your business as Schedule C, and have children under 18 years of age who help you in the business, make sure to pay them a salary and issue W-2 form them. They will have no tax liability on the first $6,300 but you, on the other hand will be able to save a few thousand dollars.
Keeping track of your business mileage on your vehicle can add a few dollars saved.
When you work from home office regularly and exclusively, make sure to take a home office deduction.
Have you purchased any fixed assets outside of CO or items on Craigslist and did not pay sales tax? Make sure to submit use tax return with your payment - use tax will be the same as your sales tax amount if you paid your sales tax with the item at the time of purchase.
If your itemized deductions are very close to a standard deduction, shift some items and pre-pay real estate taxes, charitable contributions in one year and use a standard deduction in the second year. People over 70 1/2 can choose to make charitable contributions directly from their IRA accounts; thus avoiding recognizing their distributions as income and perhaps not being able to deduct charitable contribution due to standard deduction being higher than itemized deductions.
If you are performing tax planning by yourself, compare your income from last year to this year, and compare your tax payments made so far. Also, make sure all tax deductions taken last year are applicable for you to take this year. If you learned something new, please feel free to contact our office to discuss in more detail any of the new tax strategies you are interested to implement.
November 1, 2016
Colorado Business CPA, LLC