While there are a number of things you can do to help boost cash flow at this time of year, one of the most significant decisions you’ll make regarding cash flow is to prepare your tax strategy. If not, tax season may end up taking an unwanted bite out of your cash flow.
Here are five tax-saving strategies that you should have a conversation with your CPA or tax advisor about:
1. Understand Any Outstanding Payroll Tax Liability
Make sure all your payroll taxes have been accounted for the previous year so that you have a clear sense of your liability (what you’ve withheld from employee’s payroll but you haven’t yet paid to the government). Compare your W-3 and W-2’s to payroll register and total wages reported. Knowing this amount will help you understand your end-of-year tax liability (the quarter ending Dec. 31 is due for deposit by Jan. 31) and how it might impact cash flow.
2. Understand Flow Through Taxation
If you started your business as an S Corporation or changed your business structure to an S Corp last year, then you’ll want to talk to your tax advisor about how this will impact your personal tax return in 2016. In an S Corp, the business itself is not taxed. Only the shareholders are taxed, and the profits and losses can pass through to your personal tax return. Obviously, this has a direct impact on cash flow.
3. Review Your Business Structure
If your business has grown, then you may be paying too much in tax based on your business structure alone. As mentioned above, certain businesses (like sole proprietors) may be able to realize tax savings by becoming an S Corp. With an S Corp, the owner can be treated as an employee and draw a salary from the business’ profits, except those wages are subject to self-employment taxes. Any profit that remains is then distributed to the owner(s) as dividends. Dividends are taxed at a lower rate than income, which could potentially reduce your annual tax liability. Read more in Paying Too Much Tax? It Might be Time to Incorporate.
4. Find Ways to Reduce Your Taxable Income
Expense deductions can reduce your tax liability substantially. This includes mileage and travel costs, home business costs, charitable donations, cost of equipment, supplies, training, and much more. To learn even more about deducting business expenses, visit irs.gov. Other things to consider include starting an IRA or pension plan.
5. Don’t Overlook Insurance Savings
Another commonly overlooked deduction is business insurance premiums. The IRS allows businesses to deduct general liability, property, malpractice, contributions to state unemployment insurance, life insurance, medical insurance premiums, and more. In addition, if you contribute toward your employee’s health care premiums you can qualify for a business health care tax credit.
Finally…if you haven’t done so already, now is the time to meet with your CPA or tax advisor. The payoffs for a healthy cash flow situation during the year ahead could be significant.
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