Business Tax Planning

We are beginning a periodic series on business tax planning so all readers will have a better roadmap for their own personal successes. We will attempt to cover several topics in the coming few months, beginning with this month’s feature on basic tax planning tactics. While every taxpayer is unique, there are a few rules that apply to most business owners and individuals. Here they are:

Legally avoid the recognition of income (such as not paying taxes on municipal bond income in many instances, being able to rent a property for a few days every year with no income tax consequences, etc.).

Deferring tax by deferring income (such as waiting to bill clients for December’s work until January to defer the taxes on this income until the following tax year).

Deferring taxes by accelerating deductions (such as prepaying mortgage expenses in December to get the deduction in the current year).

Use of the proper business entity (such as the choice between a C and S corporation).

Use of the proper tax year (such as selecting the year end for a C corporation of June 30 to provide planning opportunities).

Spreading income to utilize different tax rates (such as gifting certain dividend paying stocks to a child to gain the benefit of a lower tax rate for the child).

Converting ordinary income to capital gains (especially if the holding period is more than one year- the difference can be as much as 20% plus state tax rates).

Selecting a proper accounting method for your business (cash vs. accrual vs. hybrid).