Year-End Tax Planning for Small Businesses

Author: Rieva Lesonsky | December 29, 2016

2016 isn’t over yet, so there’s still time to get your business’s finances in order, which will save you money when tax time rolls around. Getting organized now means less chaos next year, when you should be concentrating on start-of-the-year promotions and customer acquisition. Plus, come January 1st, it’s too late to take tax deductions you could have—should have—used earlier. Here are tips to help maximize your deductions before year-end:

8 Tips to Maximize Your Tax Deductions Before Year-End

  1. New Loans

    Did you secure any working capital financing or small business loan alternatives? Remember the loan interest paid is deductible in each year you pay back the money (only the interest is deductible, none of the principal). You might even consider obtaining last-minute invoice financing or accounts receivable financing to get the deduction for 2016.

  2. Equipment

    IRS regulations state that to be deductible, a business expense must be both ordinary and necessary. Unfortunately, that doesn’t mean you stock up on office equipment and computers before year-end and write them all off. Whether the equipment is deductible depends on the life expectancy of the machine. If the common life expectancy is less than one year, you may deduct the purchase price. If life expectancy is more than one year, the purchase is considered a capital asset and the IRS allows you to deduct a portion of the cost based on depreciation over the lifetime of the machine. For more details, see the IRS publication 535.

  3. Charitable contributions

    Many small businesses like to donate goods or money to charities during the holiday season. In general, contributions to charitable organizations may be deducted up to 50 percent of adjusted gross income and in some cases, only 30 percent. Next year, set up a monthly donation through your company credit card so you don’t have to think about it all year. You can also take advantage of the charitable contribution deduction by donating assets that still have value, such as a car or computer.

  4. Gifting

    Before you begin buying gifts for clients and vendors, don’t forget you can deduct no more than $25 for business gifts you give directly or indirectly to each person during the tax year. Even if you give a general gift to the company and then one to a person in the company, you can still only take one deduction. Incidental costs, such as engraving on jewelry, or packaging, insuring and mailing, are not included in the cost of a gift for purposes of the $25 limit. Gifts to your own employees could be considered income by the IRS. Check IRS Publication 15-B.

  5. Education

    Reimbursing your employees for classes to improve their job positions could be a win-win for your company’s finances and staff quality. See the IRS website or ask your tax preparer the best way to establish an education benefit without making your employee count the reimbursement as taxable income. These expenses generally include the cost of books, equipment, fees, supplies, and tuition.

  6. Tax help

    Hire and pre-pay for your tax preparer now, and you can take the preparation fees as a deduction for calendar year 2016. Did you use a financial planner for your business in 2016? Those fees are also deductible.

  7. Car use

    If you use your car only for business, you can deduct the total amount of purchase cost and expenses associated with maintaining your vehicle. If you use the car for both personal and business use, you’ll need to determine the percentage of personal vs. business use. You can generally figure the amount of your deductible car expense by using one of two methods: the standard mileage rate method or the actual expense method.

  8. Tax credits

    Claiming tax credits can also help lower your tax bill. Tax credits include hiring Native Americans, providing daycare for employees’ children, and costs associated with starting a business pension plan. See the full list of business credits on the IRS website.

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