Corporate tax planning is an essential tool for every business regardless of size. Major business decisions such as the type of business structure to use, when to purchase expensive assets or collect debts, what type of accounting method to use, and much more all impact the amount of taxes a company has to pay in a given year. With careful planning and strong knowledge of tax laws, deductions, and credits, it’s possible to build strong corporate tax planning strategies to reduce tax liability in any given year.
Corporate Tax Planning Strategies
There are many different business decisions that can be optimized to minimized taxes owed for the current year or to plan ahead for a future year that might bring higher taxes. Corporate tax planning should be practiced all year in order to achieve the best results, not just during tax season.
1. Select the Best Business Entity Structure
The type of business you’re working with is an important factor when it comes to corporate tax planning strategies. Depending on the size and needs of the company, there are several different business types that might be appropriate. It’s worth considering whether your business has outgrown its current form and whether there are tax advantages to changing it. With the top US corporate tax rate set at 21% it may be beneficial to move from a pass-through business, where the company’s income is reported on the owner’s tax return, to a corporation with its own separate tax return.
Sole proprietorships, partnerships, LLCs, and S corporations all have pass-through taxation. However, LLCs and S corporations both have the option to be taxed as a corporation. Depending on the business’s profit or loss as well as the owner’s current tax bracket, it may be advantageous to change how the business is taxed in order to pay less tax overall. Different structures also have differences in terms of liabilities and the types of deductions and other benefits that they can take advantage of.
2. Defer Income
If this year’s profits are expected to be higher than next year’s, or if the business will be taxed at a lower rate next year, look for ways to defer gains until the next tax year in order to lower taxes owed this year. There are many different ways this can be accomplished.
Defer Sales: If the company is planning to sell any assets on which it will realize gains, consider delaying the sale until the new tax year if possible.
Use Installment Sales: Under the installment method of selling property, income is not recognized until payments are received. If the company is selling property before the end of a tax year but at least one payment will be received in the next tax year, gains on the sale can be taxed in the next year instead of the current one.
Defer Interest: For Treasury securities and bank certificates of deposits that mature in one year or less, interest income is not recorded until it is received. If your company wants to keep its income low in the current tax year, it can purchase short-term investments that don’t mature until the next year.
Use the Cash Method of Accounting: Under the cash method of accounting, revenue is only recorded when the cash is received and expenses are recorded when they are paid. This is in contrast to the accrual method, where revenue is recorded when a sale is made, even if payment has not yet been received. Using the cash method, it can be easier to defer income, as payments from a sale made towards the end of the year may not be collected until the next year. The company can also choose to delay billing clients to ensure that these payments are received not received until next year.
3. Accelerate Expenses and Deductions
Another method of reducing the current year’s income is to time certain expenses so that they fall under the current tax year rather than the next. If using the cash method of accounting, the company can prepay certain expenses that would otherwise be incurred during the next year.
Prepay Taxes: When paying quarterly taxes, consider paying at year end rather than in the new year when looking to reduce the company’s taxable income for the year.
Write off Bad Debts: Analyzing accounts receivable and other debts can reveal some accounts that will likely never be paid. Writing off these debts can create a deduction against income.
Accelerate Bonuses: Employee bonuses can be deductible for the current year even if they are actually paid early in the new year.
4. Accelerate Income
Different situations call for different corporate tax planning strategies. If the business anticipates being taxed at a higher rate next year or wants to take advantage of a deduction or credit that will not be available by then, the company can instead aim to reduce income recorded next year and record it in the current year instead.
One method of doing this is to encourage early payments from customers.If the company is using the cash method of accounting, the company can incentivize clients to settle their accounts before the end of the year by offering favorable terms for early payment. This can also improve cashflow.
5. Maximize Business Deductions
It’s important for a company to be aware of the various deductions that it can take advantage of to reduce taxes owed. There are many different business expenses that qualify as deductible, such as:
- Charitable donations
- Equipment purchases
- Employee benefit programs
- Training expenses
- R&D expenses
- Travel, meal, and entertainment expenses
- Vehicle expenses
- Bad debts
- Qualified business income (QBI) from a pass-through entity
- Subnormal goods that cannot be sold at regular prices
- Net operating loss (NOL) from another year
6. Take Advantage of Tax Credits
There is a wide variety of tax credits and incentives available to businesses. It’s important to be aware of which ones your company qualifies for, as they can end up having a significant impact on your company’s taxes. Examples include:
- Renewable energy credits
- R&D credits
- Work opportunity credit for hiring marginalized individuals
- Commercial clean vehicles credit
- New Markets Tax Credit
- Disabled Access Credit
- Small employer pension plan credit
- Employer-provided child care credit
These are only a few of the credits that businesses can draw on. Professional advisors can help you identify and apply for tax credits that your company qualifies for.
Finding the Right Partner
Proactive tax planning and corporate tax return preparation can be complicated tasks to navigate. When considering corporate tax planning strategies, working with business tax professionals can provide access to a wealth of knowledge and experience that your company otherwise wouldn’t have access to. But finding the right business partner can be a challenge, which is why Bizvibe’s B2B platform provides detailed insights on close to 200,000 finance companies along with tools for comparing and connecting with potential business partners, all available to try for free.