by Michelle Cote
When you make a profit as a business owner, that’s such a proud moment. Then your accountant tells you your tax bill. You think, “Was there any way I could have saved on my taxes?” There are ways to save tax dollars, some complex, some that involve spending money. Please consult your tax advisor about the following topics, and do it soon—the last half of the year is a good time to think about taxes.
Buy equipment. If your studio needs dance equipment or office computers, buy them before the end of this year to maximize deductions. Think about it like this: the government helps you pay for new equipment by reducing your income taxes for the year in which you made the purchase.
Depreciate with Section 179. You can accelerate deductions for a single year using Section 179, a special type of asset depreciation. If you buy an asset you use more than 50 percent for your business, you can deduct most if not all of the purchase price in year one (instead of depreciating the asset over multiple years). This deduction could be significant.
Say you buy a computer on your credit card in December 2017 for $2,500. Using Section 179, you can deduct the full cost of the computer from your 2017 taxable income, even if you don’t pay for the computer in full until 2018.
Are you in the market for a new or used vehicle that you’ll use more than 50 percent for business? If you buy an SUV or a heavy-duty SUV/truck this year, you may qualify for a significant tax write-off. (If you buy a sedan, the depreciation expense is limited.) If the vehicle has a gross vehicle weight of more than 6,000 pounds, you can expense $25,000 in the first year. Buy the vehicle in December, and you’ll be able to deduct most of the cost this tax year.
Start a pension plan. Opening a pension plan for your incorporated company can save you considerable tax dollars—although I recommend this only if you are ready to contribute $5,500 or more annually for yourself. Salary contributions and matching funds for your own pension will not be taxed as income until retirement, saving considerable taxes today for your business; and your retirement investments will grow tax deferred. If you plan to contribute less than $5,500 for yourself, though, choose a personal IRA instead, as pension fees and employee matches will get costly for your business.
Open a business credit card. This is the best way to track business expenses. Take this card with you everywhere to ensure that all business expenses are captured in your bookkeeping and tax return. Use it to pay for your cellphone, home internet service, vehicle repairs and gas, office supplies, and any other business expenses. (If you use something less than 50 percent for business, however, deduct the business portion only.) If an expense is on your business credit card and is paid from a business checking account, it will be included in your deductions, and you will save money on your taxes.
Michelle Cote, CPA, holds a BA in economics and an MA in accounting. She specializes in small-business tax and consulting for Dennis & Associates in Quincy, Massachusetts. She loves to help small businesses become successful.