When it comes to planning expenses for the year, taxes are generally at the top of the list early on. For some businesses, however, focusing on increases in revenue, not to mention managing effective operations, can quickly push the idea of tax planning to the back burner as the months pass by. As we rapidly approach the end of another year, it is imperative to review the current year’s tax changes that affect business deduction opportunities, and be aware of the strategic steps that can be taken before December 31, 2014, to keep some of that hard-earned revenue in the hands of the business—not the IRS. First, it is important to note the corporate tax rates applied to business in 2014 and key changes that took place earlier in the year.
Current Corporate Tax Rates
For companies that are qualified as a personal service corporation, there is a flat tax rate of 35% applied to all earnings. For those corporations that are operating as something other than a personal service entity, the 2014 tax rates can be used to estimate tax liability based on current income to the business. Those tax rates are as follows:
|If Taxable Income is Over||But not above||Your Tax Liability is||Of the Amount Over|
|$50,000||$75,000||$7,500 + 25%||$50,000|
|$75,000||$100,000||$13,750 + 34%||$75,000|
|$100,000||$335,000||$22,250 + 39%||$100,000|
|$335,000||$10M||$113,900 + 34%||$335,000|
|$10M||$15M||$3.4M + 35%||$10M|
|$15M||$18.3M||$5.15M + 38%||$15M|
|$18.3M||Flat tax of 35%|
Changes to Expensing
Although the tax rates for this year were not all that different from previous years, some distinct changes were made to the business tax guidelines that could affect your business. Most notably, the IRS drastically cut the provisions under Section 179 which speaks directly to the ability to deduct, or expense, the cost of new or used assets that meet certain qualifications. Prior to 2014, businesses were able to deduct the purchase of assets, specifically equipment used in business operations, up to a limit of $500,000; this year, that number dropped to a stifling $25,000 maximum for the same qualified asset purchases. It is also important to note that businesses cannot expense any amount above and beyond total taxable income, and those assets that are expenses, either in part or in whole, cannot also be used in depreciation calculations.
This has created the need for businesses to be more strategic in the way they expense asset purchases, and think much harder about the benefits of depreciation versus deducting purchase expenses. When it comes to expenses, as it relates to Section 179, businesses should consider imploring the following tax tips:
- Make the most of expensing by purchasing necessary equipment before year-end, if your business is not yet near the limit. It may even be recommended to research loan or alternative finance options for an equipment purchase if cash is not readily available, all in an effort to reduce the total tax liability for 2014.
- If your business has already come close or gone above the threshold for qualified asset purchases, it may make the most sense to defer purchasing any new equipment until 2015. You may be able to use the additional deduction more effectively in the upcoming year.
- If your business is utilizing both depreciation and expensing for the 2014 tax year, it may be beneficial to use the expensing election for purchased assets with the longest depreciation time frame. This means that depreciation may be used in following years, when expensing is no longer an option.
Additional Year-end Deductions
The simplest way to reduce taxable liability for any business is to increase deductions; however, keeping up with all the deductions available to businesses can be a time-consuming challenge. Here are a few of the most commonly missed deductions that are easy to take advantage of before year end that can positively shift your tax obligations for the year.
- Activities related to domestic production, for those companies operating in domestic manufacturing, construction, engineering or architecture industries, may provide an additional deduction of up to 9%. Eligible businesses can deduct certain qualified income related directly to production activities which reduces tax obligations without an additional capital outlay.
- As a new business owner, a number of deductions are available as start-up deductions, including but not limited to conducting market surveys, travel associated with finding customers or vendors, advertising and marketing costs as well as training a workforce. Up to a total of $5,000 of these qualifying expenses can be deducted if your business was new in 2014.
- Qualified retirement plan contributions also have a positive effect on reducing taxable income. In addition to providing additional benefits to employees and building your own retirement savings, business owners are allowed to maximize qualified contributions to retirement savings vehicles before year-end, up to the annual contribution limits laid out by the IRS. Additionally, tax-favored benefit plans can reduce taxable income while providing quality perks to employees. Medical expense reimbursement plans, group life insurance or dependent care reimbursement plans are among the most popular to offer, and can be implemented with a tight budget in mind.
Available Tax Credits
In addition to reducing business income through expense deductions, companies have the opportunity to take advantage of certain tax credits. The most notable for 2014 is the small employer health insurance credit. If your business purchased health insurance coverage for employees through a qualified marketplace during 2014, you have the potential to qualify for a credit worth 50% of the total employer contribution to the plan premiums.
Lesser known alternative credits that may be worth discussing with your tax advisor prior to year end include:
- Investment credit
- Disabled access credit
- FICA tip credit
- Small employer pension start-up credit
- Employer-provided child care credit
- Energy credit
Each of these tax credits are based on improvements or changes made to your business throughout the 2014 calendar year, and may require a larger cash outlay than some can stomach; however, it is worth researching each credit available, and crunching the numbers with your tax advisor to accurately determine the cost benefit of spending the extra dollars these specific improvements or changes may require.
In order to effectively run your business, tax planning needs to be on the docket well before it is time to file. Paying unnecessary taxes can eat away at your profits, and can make growth in terms of revenue and operational expansion an uphill battle. Understanding your business tax rate is the ideal place to start, followed closely by being keenly aware of your projected income for the year. Once this information is clear, it is easier to decide which strategic moves will have the greatest positive impact on your after-tax revenue for the year. If you are concerned about missing deductions or have detailed questions regarding the credits that relate to your operations this year, you still have time to consult a tax professional in your state before the year ends.