Your business taxes should be one of the key areas you review on a regular basis to ensure you are taking advantage of any laws in your favor. Federal, state, and local laws change often enough that you may not realize that you are missing out on substantial savings on taxes. As a result, you should consult your accountant and tax attorney about conducting a full assessment of your situation at least annually. Here are some common areas where we find clients can often reduce their taxes:
5 Ways to Reduce Business Taxes
Change the Tax Status of the Business
Your taxes can vary significantly depending on how your business is organized (e.g., corporation, partnership., LLC, etc.) and its tax classification (S corporation, C corporation, etc.). For example, a C corporation will pay taxes on its corporate income while shareholders pay taxes on the income (dividends) they receive. This amounts to double taxation. In contrast, with an S corporation, the corporate entity is disregarded and only the shareholders are taxed on their proportionate share of the company’s income. However, an S corp is not always the best option. There are other reasons why a company may want to be a C corp over an S corp. so it is important to analyze all issues before choosing a legal entity.
Redomicile the Business
State and local taxes can add up for a business. Relocating to another state or offshore may save you enough money to justify the expenses associated with moving. You should assess your real estate and income taxes in your current area vs other options and determine if there are any extra tax breaks you could get to stay where you are or move. However, also analyze the availability and cost of labor and services you may need. With respect to moving to another country, there are also business issues you should consider. Choosing a location should involve much more than just looking at your tax bill.
Buy/Sell Property with a 1031 Exchange
Companies can defer paying capital gains taxes by selling commercial real property and using the proceeds to buy another qualified property. There are strict time limits within which to buy the replacement property, but if these are met, the business does not have to pay capital gains taxes on the sale until the replacement property is sold. This tactic is most often used with properties that are already significantly depreciated and the company does not need the cash proceeds and can reinvest it in another property.
Take Advantage of Depreciation
Continuing with the 1031 scenario discussed above, the company can conduct a cost segregation study on the replacement property to determine how much of the property’s value is the land vs the building. The reason for doing this is because the building, but not the land, can be depreciated which provides a tax deduction for the company. How quickly the building can be depreciated depends on its category under tax laws. The period may be as short as 3 years or as long as 27.5 years. The shorter the timeframe, the higher the deduction every year.
Maximize Stimulus Tax Credits
The federal and state governments provided various tax benefits to businesses during COVID. These included the Employee Retention Tax Credit (ERTC), Paycheck Protection Program (PPP), Economic Injury Disaster Loan (EIDL), and other programs. In some cases, you may still be able to apply to take advantage of these or amend your tax return if you failed to utilize them.
These are just a few of the possibilities for saving on taxes. A comprehensive evaluation should be conducted by your accountant and tax attorney taking into account the impact on your business beyond just taxes.
We work with clients and their financial advisors to provide regular assessments of their business and identify opportunities for them to increase revenue and save money. Contact us to discuss your business’s needs.