Don't overpay taxes - understand deductions and credits
Tax season is here. Rather than dreading it, look on it as a chance to identify money-saving opportunities for this year. When you file your taxes for the previous year, it's a perfect occasion to plan your tax strategy for the current year (and beyond). While you have all of your business's financial data in front of you, take time to analyze how you can take full advantage of the provisions, credits and deductions that are legally available to you. Putting a solid strategy for 2017 in place may enable you to:
- Reduce the amount of your taxable income
- Lower your tax rate
- Control the timing of your tax payments
- Claim all available tax credits and deductions
- Control the effects of the alternative minimum tax
Knowing which deductions you may be able to claim allows for better planning. Consider whether your business could benefit from some of these commonly used deductions:
Business equipment. Through Section 179 of the Internal Revenue Code, you may be able to deduct the cost of up to $500,000 of qualifying equipment (subject to a phase-out if your business has capital expenditures exceeding $2.01 million). For example, if your business tax rate is 35 percent and you purchase $400,000 worth of equipment, the net cost to you would be just $260,000. The Section 179 cap will be indexed to inflation in $10,000 increments in future years.
Even if your business equipment purchase isn't eligible for a Section 179 deduction, you may be able to depreciate 50 percent of the cost of equipment placed in service during 2017 through a special depreciation allowance. The bonus depreciation will phase down to 40 percent in 2018 and 30 percent in 2019.
Entertainment expenses. Generally, you may be able to deduct up to 50 percent of business entertainment expenses. To qualify for a deduction, business must be discussed before, during or after any meal that's deducted, and the surroundings must be conducive to business discussion.
Retirement plan for employees. You can deduct employer contributions to an employee retirement plan. If your business doesn't already have a retirement plan, a 50 percent tax credit for startup costs can help you launch one.
Tax credits can be even more valuable than tax deductions since they reduce your tax directly instead of reducing your taxable income, as deductions do. Look into these credits:
Employee health insurance premiums. If you buy health coverage for employees through the SHOP Marketplace, you may be eligible for the Small Business Health Care Tax Credit. To qualify, you must have fewer than 25 full-time equivalent employees.
Research. The business tax credit for increasing research activities was made permanent by legislation signed in December 2015. The credit helps offset the cost of qualified research expenses. Certain small businesses can offset their alternative minimum tax or payroll tax liabilities with research credits.
Get expert advice
Be sure to consult your tax advisor before taking action that could change your tax status. And for more ideas to help you make your business a success, visit California Bank & Trust's Business Resource Center.