Strategic Tax Planning for US Businesses After April 15th

Introduction

After filing extension, it’s the right time to play with tax codes and rules to maximize the benefit by reducing our tax bill. The main tax season end on April 15, and we begin tax planning for the extended returns from next day. Tax planning means maximising tax benefits by using company’s financial information. We should evaluate whether our tax strategy is supporting our business goal by asking few questions such as, is the tax bill more than expected? Did we take maximum tax benefits etc.

Understanding US Tax Regulations

The Essentials of Tax Planning

Taxes can eat your annual earnings; tax planning is the constructive way to counter this. The objective of tax planning is to amplify tax benefits without break tax rules. Periodical changes and updates in tax codes by IRS makes strategic tax planning more complex. By staying informed about tax regulations and utilising legal methods, we can minimise tax liabilities by maximising tax deductions, credits, and expenses.

Proactive Tax Planning Strategies 

Tax planning is a proactive way of saving on taxes. Be proactive so we can maximize opportunities to reduce tax liabilities. Catching the benefits of deductions, boost business tax credits, select the appropriate tax structure, shifting of income and seeking advice tax professionals are few examples of strategic tax planning.

Maximizing Deductions and Credits

Crucial method of tax planning is to locate and maximize available deductions and tax credits. Taxable income is decreased by deductions including those for company expenses and tax credits directly lower the tax obligation. Here are the major tax deductions and credits with recent updates.

Deductions

• Qualified Business Income Deduction: - Allows a deduction of up to 20% of qualified business income for owners of some businesses. Limits apply based on income and type of business.
• Business Mileage: - We can claim a deduction based on the mileage used for the business purpose at the rate of 65.5 cents/mile.
• Energy Efficient Commercial Buildings Deduction: - We can get this deduction only if a business owner place energy efficient commercial building property or energy efficient commercial building retrofit property in building systems and the property increases minimum of 25% energy efficiency.

Credits

• Research and Development Tax Credit: - We can claim this tax credit for certain qualifying domestic expenses related to research and development. We can set off income tax and payroll taxes against this credit.
• Commercial EV and FCEV Tax Credit: - Businesses can avail a tax credit for the purchase of new Electric Vehicles (EV) and Fuel Cell Electric Vehicles (FCEV) from tax year 2023.
• Work Opportunity Tax Credit: - This credit aims to support individuals from certain targeted groups who have faced significant barriers to employment. This credit is based on wages paid to the employees and these employees should get employed before 01/01/2026.

Leveraging Losses and Depreciation 

Depreciation

• Bonus Depreciation: - Allows 80% expensing for qualified business property acquired and placed in service during tax year. The 80% allowance generally decreases by 20% per year in upcoming tax years.
• 179 Deduction: - Allows 100% expensing for qualified business property acquired and placed in service during tax year with subject to certain limitations.
• De Minimis Safe Harbor Election: - Small businesses can elect to expense assets that cost less than $2,500 per item in the year they are purchased.

Business Losses 

• Net Operating Loss: - A net operating loss can be carried forward to offset taxable income in future years indefinitely and can be offset a maximum of 80% taxable income in a year.
• Capital Losses/Investment Losses: - investment losses can be written off against your investment gains or other income up to a certain limit each year ($3,000 - MFJ and $1,500 - MFS).
• Tax Loss Harvesting: - Tax loss harvesting is a strategy in which an investor sells an investment at a loss, replaces it in their portfolio with a similar investment, and uses the capital loss to offset their gains or other income.
• Passive Losses: - If a taxpayer's passive losses are limited in the current year, the losses can be carried forward until fully applied against passive gains or until the activity that generated the passive loss is sold or otherwise disposed of.

Retirement Planning as a Tax Strategy

• Traditional 401(k) Plan: - By setting aside a certain percentage of your salary (up to $23,000 in 2024, or $30,500 if you’re 50 years or older) into your 401(k) account, you can lower your taxable income by that amount in the present and defer paying taxes on that money until you withdraw it in retirement. Usually, businesses contribute same to their employees and business owner’s account.
   
• 401(k) Profit Sharing Plans & Cash Balance Plans: - employers make contributions to employee retirement savings accounts based on the company’s profitability in a year.2024, In 401(k) profit sharing plan, maximum employer contribution limits are Up to 100% of an employee’s annual salary or $69,000 per year ($76,500 for employees 50 and over), whichever is higher.

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Tax Saving Tips for Different Business Structures

Choosing the right tax structure of business can influence the tax goals. C-Corp taxable income taxed at the corporate rate of 21%, S- Corp passthrough income are treated as passive income and not required to pay 12.4% Social Security Tax or the 2.9% Medicare Tax on this income are few tax benefits of selecting right tax structure.

Advanced Tax Planning Techniques

Income shifting: - In this technique we can transfer income from a high tax bracket member to low tax bracket member within family or business. Selling or gifting property and leasing it back is one of the popular techniques used for this.

Charitable Contribution: - Charitable donations made by passthrough entity is non-deductible business expense as per tax and will pass through to personal return of the pass-through owners and can claim deduction in their personal tax return. But C-corps can claim charitable contribution deduction up to 10% of taxable income. Alternatively, business owners can support their favourite charities through sponsorship opportunities and company gets exposure to potential clients and usually goodwill with all stakeholders for the charitable action. And can typically deduct the sponsorship as a marketing expense.

Technology in Tax Planning

We are living in 2024 and in this era, technology is dominating everywhere. Using advanced technology and updated software ease the humans work by automated calculations, diagnosing errors in tax forms, and ensuring adherence to tax laws and regulations. Enhanced efficiency and productivity, accuracy and automated calculations, standardization of processes, etc are the major benefits of technology-based tax planning.

Avoiding Common Pitfalls

Business owners should be proactive and careful while doing strategic tax planning for the business. Common mistakes to avoid in tax plannings includes, planning tax savings at the end of the financial year, not keeping up with the latest tax laws and regulations, neglecting quarterly estimated tax payments, failure to keep accurate records, overlooking available tax credits and deductions or misinterpreting tax laws, etc.

Conclusion

Getting together with a tax advisor and creating a solid strategy for putting money back into your pocket rather than handing it over to the government is a good way to accomplish tax planning. Be proactive before starting, purchasing, expanding or selling a business, before purchase a new property, before starting a new real estate venture, before making any investments. Before is the key word here, means consult a tax advisor before taking any major decisions.