by Jason Gray
SCORE’s experience with mentoring small businesses shows that there is a serious lack of awareness of how taxes can impact the profitability of a business. Businesses should look to their CPA to play an important role in explaining current tax obligations and advising them on tax strategies. Often we see the contrary, companies do not employ a CPA or only make an annual visit for preparation of their taxes.
There are a number of new and proposed tax laws that present small businesses with opportunities for reducing taxes, lowering expenses, and encouraging investment. However, the U.S. government’s General Accounting Offices reported that small businesses do not have the knowledge of the tax credits available and/or how to take advantage of them due to the complexity of the regulations.
Here are several tax items that a business should consider to increase their bottom line:
Entity Structure. The proper entity choice could help reduce self-employment taxes, increase taxable deductions and lower your effective tax rate.
Tax Credits. Your business could be passing on important tax credits related to research activities, new hires, and small business health insurance plans.
Tax Deduction. There are some tax deductions that are only allowed for specific operations and locations. For example, some businesses operate from home with no other administrative offices. Home office deductions are allowed. A portion of their home’s utilities, rent, insurance, repairs, internet and more can be deducted. In addition, you can deduct business miles starting from home; whereas, other business owners must commute (nondeductible) to their office.
Retirement Plans. Depending on your age, profitability, and entity type, your CPA can help you determine the retirement plan that best fits your circumstances. Businesses have a variety of plans to choose from, including IRA, SIMPLE-IRA, 401(k), solo 401(k), 401(k), simplified employee pension (SEP), Keogh and corporate profit-sharing, and defined benefit pension plan.
As an example of proper tax planning, Idaho recently approved House Bill 80. The bill states that corporate officers in Idaho will be required to show that they are not legally associated with the corporation any more to be eligible for unemployment insurance benefits. Accordingly, corporate officers can now opt out of Idaho unemployment insurance tax for themselves. The Idaho Department of Labor for FY 2010 stated that the standard rate for Idaho unemployment insurance tax was 3.36%, which generated a tax of $1,118 on $33,300 wage base. Opting out of the state unemployment insurance tax can increase the officer’s federal unemployment tax to a maximum of $434. In short, a business could receive a tax savings of $684 per corporate officer.
You may tell yourself that a few missed deductions won’t matter. However, a business’s failure to plan and keep proper records could have a significant impact. Let’s briefly look at the Domestic Production Activities Deduction (DPAD). It has significantly increased over the past few years and businesses often miss the deduction. DPAD is generally 9% of the lesser of your qualified production activities income, or your adjusted gross income with some threshold limitations. This deduction can add up to a tax savings of thousands of dollars. Such deductions from income are generated through the following U.S. activities:
1) construction of real property
2) engineer or architectural services
3) lease, rent, license, sale, and exchange of qualified production you manufacture
If you are concerned about fees, ask the CPA about their pricing policy. Overall, be sure that the accountant is a licensed CPA in Idaho. Also consider whether the CPA’s background is a fit with your business and your goals.