Reducing Your Tax Bill
Author of this post: David C. Baker | About Blog Authors »
With the deadline for your personal taxes just around the corner (and your corporate taxes a few weeks ago), it’s time to review if you’re doing what you can to save on taxes. Even if it’s too late for some of these strategies this year, it’s never too late to plan ahead for the 2008 tax year. So let’s talk about what to consider at the end of each calendar year.
Spend your time concentrating on ways to reduce your tax bill, not merely defer it. Here are some basic ideas to consider:
• If you own your own building, raise the rent you are paying to yourself. As long as that amount approximates market rates, you’ll be legally saving yourself FICA and removing money from the business in a tax advantaged manner.
• If you need hardware/software and have not yet purchased all that you are allowed to “expense” (vs. depreciate), buy it before the year ends.
• Prepay legitimate expenses, particularly if you are near a different income tax bracket and the difference will put you in a lower one. You can accomplish the same thing by deferring income, but that’s only useful if it will move you to another bracket.
• Fully fund your retirement plan. You might want one of the more integrated, aggressive plans.
• If you do strip money out of the company, leave at least 2 (hopefully 3) months of overhead liquid so that it can be loaned back to the company if it needs it before the reserves are built back up again.
• Pay out employee bonuses (but be careful about setting a precedent for regular annual bonuses.
The “be careful what you do with it” part comes in next. Don’t spend money on things you don’t need. Just pay the taxes and be done with it. When you buy things just to reduce your tax bill, essentially you are getting a discount on something you don’t need. Better not to buy it at all. Tax law is designed in part to encourage consumption—don’t fall for it. We hear many clients who are trying to find ways to spend the excess just to save on taxes. That is an attitude often encouraged by CPAs (or CAs if you are reading this outside the US).
