Business owners have a lot to think about during the year. Among their concerns are taxes. However, taxes often get the least amount of consideration, though they are arguably among the more important factors impacting their business.
“In a tax year marked by the newly enacted Tax Cuts and Jobs Act, it is vital that business owners recognize the importance of understanding their tax liability and how tax planning throughout the year can benefit them come filing season,” says Brian D. Kitchen, director of Tax Strategies at Kreischer Miller.
Smart Business spoke with Kitchen about the ways in which taxes could affect business decisions throughout the year.
What are some tax incentives business owners should keep in mind?
When business owners are made aware of certain tax incentives during the year, it provides their advisers with an opportunity to explain the benefits of such incentives. It also enables business owners to factor these tax savings into their current year tax calculations.
There are many tax incentives built into the Tax Cuts and Jobs Act for businesses in a variety of industries. These incentives are in the form of tax credits, which reduce tax liability dollar for dollar, and tax deductions, which reduce taxable income.
Some common tax credits include the Work Opportunity Tax Credit, which allows employers to claim a tax credit based on hiring a certain targeted group of individuals; and the research and development tax credit, which rewards companies that innovate and invest in new products and processes. The code also provides for immediate expensing of certain depreciable property, such as machinery and equipment. The new tax bill also introduces a 20 percent deduction on pass-through businesses.
It is important for a business owner to understand the substance and mechanics of the incentives in the new tax law as well as a host of other federal and state tax incentives, as planning might be needed to take full advantage of them.
How might estimated tax payments affect a business?
The income tax expenses of business owners are a cash flow item that requires attention, not only for budgetary reasons, but to mitigate potential interest and penalties on any underpayment of taxes. The IRS and many state and local governments require that estimated income taxes are paid during the year on income that is not subject to tax withholding. This is especially important for business owners of pass-through businesses, those being S-corporations and partnerships, as their pass-through income is not subject to tax withholding.
When the estimated taxes are calculated on a quarterly basis, business owners are able to readily understand the cash flow impact their tax expense has on their business. More importantly, in a year with a dramatic change in the tax code, quarterly tax projections provide business owners with a real-time understanding of how changes in the code impact their businesses.
Why should business owners keep their advisers informed throughout the year?
When advisers are able to meet and communicate with their clients throughout the year, it enables them to provide proactive advice that will not only affect owners’ businesses during the year, but will ultimately provide peace of mind and help prepare for their tax filing the following spring. This approach lessens the probability of surprises in the form of unexpected tax bills, enables a business owner to make more informed decisions where a tax incentive could be utilized and provides for a smoother compliance season as many tax-related items would already have been discussed throughout the prior year.
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