1) Adopt a Retirement Plan
A business has several different retirement plans it could adopt. The most common plan is the 401(k) plan. With a 401(k) plan the employee is allowed to defer on a pre-tax basis up to $17,500 in 2013. If they are over age 50 they can defer an additional $5,500 in a so-called catch up contribution. An employer may adopt their plan where there is an employer match made to the employees account. Alternatively a business might adopt a profit sharing plan. This plan is exclusively funded by the employer. The amount contributed is expressed as a percentage of the compensation the company paid. This amount can go up to 25% of compensation. The profit sharing plan has flexibility as there is no requirement to make annual contributions.
2) Maximize Depreciation Deductions
Fixed assets that are purchased must be depreciated. Fixed assets include vehicles, machinery, equipment and real estate. The depreciable lives of these assets vary. Taxpayers however may elect to immediately expense some of their fixed asset purchases. This is known as Section 179. Generally real estate and vehicles are not eligible for this. Vehicles that weight over 6,000 pounds however are eligible for this tax election.
A business can elect to expense up to $500,000 of fixed asset purchases in 2013. There is a cap on the total fixed asset purchases of $2,000,000. This accelerated deduction is scheduled to decrease to $25,000 in 2014. So, as a practical matter business owners should look out into the first two quarters of 2014 and determine if they were anticipating any fixed asset purchases. If so, you may want to make those purchases in 2013.
3) Cash Basis Taxpayers Accelerate Deductions
Some taxpayers on the cash basis of accounting. They pay taxes on their net profit using the cash basis of accounting. Other taxpayers are on the accrual basis of accounting. They need to recognize accounts receivable, accounts payable and adjust their inventory if they have one. For taxpayers on the cash basis of accounting, they would consider accelerating deductions to reduce their taxable income.
If you are a small business owner will you take these 3 steps to reduce your income tax?
Tom Scanlon has over thirty years experience in public accounting with an extensive background in the areas of financial, tax, and estate planning. He prides himself on providing in-depth and customized solutions to privately held businesses and their owners. He is a Certified Public Accountant and Certified Financial Planner®. Tom is a frequent speaker for area organizations and has recently been quoted on CNBC, Fox 61 News and AARP's blog. Tom also has been a guest columnist for numerous publications including The Wall Street Journal, Barron's, Money Magazine, The Hartford Courant, The Hartford Business Journal, and The New Haven Register. He is a member of the American Institute of Certified Public Accountants, the Connecticut Society of Certified Public Accountants, and the Financial Planning Association. Active in the community, Tom supports a variety of not-for-profit organizations.
