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March 2016 Tip of the Month

REDUCE THOSE INCOME TAXES

It's tax season, so we'll try to be brief (yeh, right Abo)! 

Here are but two illustrative tax strategies that you can begin implementing now in 2016 to reduce your taxes just in case you didn't listen to us in 2015.  If you're an employee, guess who might benefit if you bring this up to your employer?  If you're an employer, guess who benefits by so considering? If you're self-employed, guess who's looking at "two pockets on the same pair of pants". 

LET'S THINK TAXES PEOPLE.

Reimburse employees for out-of-pocket business expenses. Employees normally receive little or no tax benefit from paying business expenses because they're deductible only to the extent they exceed (a) 2% of the employee's adjusted gross income and, (b) when combined with the employee's other itemized deductions, the employee's standard deduction. For example, an employee whose compensation is $2,000 higher than it would otherwise be because he's expected to incur about $2,000 in unreimbursed business expenses isn't being fairly compensated for the out-of-pocket expense. After paying income and payroll taxes on the $2,000, he has less than this amount to spend on the business expenses. A better approach would be for the company to reimburse at least part of the employee's business expenses (and renegotiate the employee's compensation accordingly). Because properly documented expense reimbursements aren't considered compensation, both the company and the employee save payroll taxes on this arrangement. The employee comes out better on income taxes as well.  By the way, if it's your corporation, guess who is also an employee?  You!

Sell rather than trade in vehicles used in business. Although a vehicle's value typically drops fairly rapidly, the tax rules limit the amount of annual depreciation that can be claimed on most cars and light trucks. Thus, when it's time to replace the vehicle, it's not unusual for its tax basis to be higher than its value. If you trade the vehicle in on a new one, the undepreciated basis of the old vehicle simply tacks onto the basis of the new one (even though this extra basis generally doesn't generate any additional current depreciation because of the annual depreciation limits). However, if you sell the old vehicle rather than trading it in, any excess of basis over the vehicle's value can be claimed as a deductible loss to the extent of your business use of the vehicle.

Through careful planning, it's likely your tax liability can be significantly reduced and your business' overall financial position improved.

We CPAs have any number of tax-saving ideas to get you started. As always, we suggest you confer with your tax advisor (hopefully that be us or other pro-active and trusted advisors) to help you sort through the options and implement strategies that make sense for you.