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Guide

How To Reduce Your Business Taxes

Reducing business taxes is priority for many small & mid size businesses. Cadence Bank highlights how businesses can take advantage of tax-saving opportunities.

Reducing taxes should be a primary goal for small and middle-market businesses. And there’s no better time to focus on tax reduction than during the fourth quarter of the year.

“By implementing year-end tax strategies, businesses can help ensure they pay the minimum amount of tax when they file their 2016 returns next year,” says Cadence Bank Treasury Management Senior Vice President Kacy Owsley. “Without proper planning before December 31, companies might neglect to implement strategies that could result in significant tax savings.”

Permanent vs. Temporary Tax Reduction

Amy Roberts, National Managing Partner, Corporate Tax Services for Grant Thornton LLP, divides corporate tax strategies into two broad categories: those that result in permanent tax reduction and those that result in temporary tax reduction. “Two good examples of permanent tax reduction strategies are the Section 199 domestic production deduction and the research and development (or R&D) tax credit,” she says. 

The Section 199 deduction is available to manufacturers that perform domestic manufacturing and certain other production activities. These typically include the manufacture, production, growth or extraction (MPGE) of tangible personal property that’s done in whole or in significant part in the U.S.; construction of real property in the U.S.; and engineering or architectural services in connection with real property construction projects in the U.S.

The R&D tax credit is a dollar-for-dollar credit against taxes owed or paid. Companies can take the credit for all open tax years as well as the current year, and tax credits may be carried forward 20 years. R&D expenditures generally include all expenses related to the development or improvement of a product. Roberts says a wide range of different research and development activities qualify for the deduction, so you should talk to your tax advisor to determine if your company could benefit from the R&D tax credit.

 

Year-end Tax Strategies

Most year-end tax strategies fall under the category of resulting in temporary corporate tax reductions, says Roberts. “These strategies generally revolve around the idea of accelerating deductions for capital expenditures and fixed assets into the current year while deferring taxable income into the following year,” she explains. “Doing so will effectively shift some of your 2016 income into 2017, thus reducing this year’s tax bill.”

 
For cash basis taxpayers, one way to defer income is to wait until January to send out some of your December invoices. “Determine the impact this could have on your year-end cash flow and plan accordingly,” says Roberts. Keep in mind that if you receive checks in December, you’re considered to be in constructive receipt of the funds even if you don’t deposit them and thus should pay tax on the income this year.
 
As for accelerating tax deductions, determine if you can pre-pay business expenses that will be incurred early next year before December 31. Also consider purchasing new equipment and placing it in service before the end of the year if you’re planning to buy it early next year. This is especially important if you haven’t bought at least $25,000 worth of tangible business property yet this year. Under Section 179, you can deduct (instead of expense) up to $25,000 in annual equipment purchases, including computers, software, machinery, office furniture and other tangible goods.
 
“Also, if you refinanced debt this year, you may be able to deduct fees and expenses associated with the refi,” Roberts adds. “And if you have any uncollected debts this year, you may be able to deduct these if your business uses the accrual method of accounting.” The IRS considers uncollected credit sales to customers, loans to clients and suppliers, and business loan guarantees to be deductible bad debt.
 

 

Don’t Forget Retirement Plan Contributions

One year-end tax move that’s often overlooked by business owners is making an additional contribution to their retirement account. 
 
Any contributions you make before December 31 to a qualified retirement plan like a solo 401(k) plan will reduce your personal income tax liability for 2016. If you have a traditional or SEP-IRA, you have until next April 15 (or your tax-filing deadline, including extensions) to make a tax-deductible contribution for 2016.
 
When it comes to year-end tax planning, time is of the essence. December 31 is a hard and fast deadline — if you wait until after this date, you may sacrifice opportunities for significant tax savings.
 
Be sure to talk to your tax advisor about these and other tax-saving opportunities for your business.
 
Cadence Bank can help you plan tax moves that are in line with your lending, retirement planning and other corporate strategies. For more details, please contact your Cadence business banker.
 
Read also: The Federal and State Tax Returns: Maximizing Small Business Gains
 

 

This article is provided as a free service to you and is for general informational purposes only. Cadence Bank makes no representations or warranties as to the accuracy, completeness or timeliness of the content in the article. The article is not intended to provide legal, accounting or tax advice and should not be relied upon for such purposes.

 

 



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