Tax planning becomes even trickier with the tax reforms happening, so read on for your guide to the most effective tax strategies.
In this article:
Smart Tax Planning Techniques to Keep in Min
Business Deductions
1. Review your Assets
You can write-off fixed assets when it is determined that they are already scrapped or no longer useful. The scrap value of an asset helps you determine the annual depreciation which affects the company’s net income. Another interesting strategy when it comes to assets is combining low-value pool assets and depreciating them at a higher rate. Also, watch out for your low-value assets which cost $300 or less, as they can be immediately written off under some conditions.
2. Write-off Bad Debts
You can write-off bad debt expenses or those uncollectible accounts due to certain conditions from your income statement. This expense account is deductible from your sales revenue and lowers your net income.
3. Maintenance Costs
The repairs on your work car are considered operating expenses and may be deductible from your revenue. Other deductible maintenance costs include cleaning, repairs on investment properties, and equipment maintenance fees. Group your maintenance costs together and you may come up with a significant amount of business deductions in your income statement.
Deferred Income
4. Determine Whether to Use Cash or Accruals
Deciding which method to use is important because it affects the cost of goods sold section of the income statement. In determining what method to use, you need to consider the type of your business, your accountability to third parties, and your future plans for the business.
On a cash method, it is easier to maintain because all transactions are tracked in an actual cash in cash out basis. Accrual method, on the other hand, recognizes income when earned and expenses when incurred regardless of the actual receipt or disbursement of payments.
5. Unearned Income and Interests
At the end of the financial year, make sure to exclude received revenues that haven’t been earned yet. This tax planning strategy helps you defer income until the next financial year.
Capital Gains Tax (CGT)
6. CGT Discount
The discount method of computing your capital gains applies only to individuals and trusts. Additionally, to qualify for CGT discount, the disposal or sale of an asset must have a 12-month threshold. So if you are planning to sell or dispose of an asset, make sure to wait until you held it for 12 months.
7. Roll Gains into Other Assets
One important benefit to note about capital gains tax is the law allows you to roll them over into other assets. This allows you to defer tax payments on capital gains. You can reinvest these proceeds into similar investment types within 180 days. This like-kind exchange is governed under IRC Code Section 1031.
Companies and Trusts
8. Offset Tax Losses
If you have tax losses from previous years, you can actually offset them against your income for this year. This provision is a great way of creating future tax relief. In most cases, you can offset any tax losses for up to seven years. However, most states do have their own regulations, so it is best to check with your state on what rules do apply.
9. Consolidate Your Taxes
Having separate companies allows you to consolidate your taxes. This is especially helpful when you have losses from other entities as you can offset your profits against them.
Unsure of what tax deductions you may avail? Watch this video by Docstoc TV to know the basics of tax deductions:
Tax planning always gives individuals and business owners several challenges and numerous tax problems, especially at yearends. This is where tax planning comes into play. Defining your plans earlier will benefit you. Make sure to study these helpful tax plan strategies to help you run your business smoother and even save some cash as you pay your taxes.
What other tax planning strategies do you know of? Share your thoughts with us in the comments section below.
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