If you’re like many busy restaurant owners, you don’t pay much attention to income taxes until the filing deadline looms.
“That can be a costly mistake,” says Public Accountant, Jay Blumenthal, Abington, PA. “One of the most effective ways to pare your business as well as personal income taxes to the legal minimum is to make tax planning a year-long effort.”
CPA Genevia Gee Fulbright agrees. “Proactive tax advisors suggest that you take an active role in tax reduction strategies throughout the year,” she says. “Because tax laws change often, it's best not to wait until the end of the year or after to decide whether you can take advantage of important tax deductions.”
While it’s only natural for you to devote the biggest share of your time to maximizing your restaurant’s income, it’s important to remember the draining effect that taxes have on those before-tax dollars. Here are 10 easy tax planning tips that will help you to maximize your net income in 2016 and all the years to come.
1. Organize your records now.
“If you scramble at tax time looking for receipts and other records to pass along to your accountant, you’re probably missing out on some healthy deductions,” says Blumenthal.
“By keeping your records up-to-date and easy to understand, you’ll make your accountant’s job easier; and an easier job for your accountant means a savings on your tax preparation bill as well as your taxes.”
2. Look for deductions that you may have missed in 2015.
Many business owners and managers miss out on important deductions by waiting until the last minute. “I’m willing to bet that every taxpayer misses at least one deduction on their tax return each year,” says Roni Deutch, tax attorney and author of The Tax Lady’s Guide to Beating the IRS.
“Keep receipts for everything,” advises Bridget Crawford, professor of law and associate dean at Pace Law School. “The cost of office supplies and internet service are easy to track, but keep in mind those ‘minor’ expenses that keep your business going day-to-day.”
3. Don’t forget interest on purchases financed by loans or credit cards.
“Most of the time financing purchases on your credit card is a bad idea,” says Deutch. “However, since the interest paid on business expenses is tax deductible, there are exceptions, especially toward the end of the year when you need to rack up a few more deductions. Simply pay some business expenses or purchase some office supplies on a business credit card just before December 31. You get the deduction on your 2016 tax return, but you don’t have to pay the bill until next year.”
4. Take advantage of Section 179.
Most new business equipment can be depreciated over its useful life or expensed immediately under Internal Revenue Code Section 179. This provision of the law permits you to deduct the full cost of capital assets in the year of purchase up to a maximum deduction of $25,000. “If you’re not taking advantage of the Section 179 deduction, you’re missing out,” says Deutch.
Taking the 179 deduction is easy for you or your accountant. Simply fill out Part one of IRS form 4562, available free from the IRS (www.irs.gov). Attach it to your tax return as you would any other additional form, such as a Schedule C.
Consider making any capital expenditures you’ve been planning before year-end 2016 in order to lower that year’s tax bill. Purchases made right up to December 31 2016 are eligible for the Section 179 tax deduction.
5. Combine pleasure trips with some business.
If you’re planning any pleasure trips in 2016, consider adding in a little business. Can you visit a restaurant or trade show in your destination city to discuss business techniques that may help to improve your management skills?
When you travel away from home, you may deduct fares, meals, lodging and incidental expenses (as long as they are not extravagant). The definition of "away from home" is any trip that takes enough time that the traveler could reasonably be expected to need sleep or rest.
The definition of home is your regular place of business. When the primary purpose of the trip is business, you may deduct travel expenses even if you enjoyed some nonbusiness extracurricular activities.
If more than 50 percent of the time you spend away from home is spent on pleasure, the cost of transportation will be disallowed. However, if more than 50 percent of your time is devoted to business, all travel expenses are deductible.
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6. Maximize your tax-deferred retirement account early.
Make the maximum allowable deposits into your 401(k) or IRA account as early in the year as possible. This is universally regarded by financial experts as one of the most important tax- savings techniques.
“When you've got a stack of bills, it’s easy to forget the person you should be paying first: yourself,” says Crawford. “I don't mean a salary. I mean contributions to your retirement account, even if you can only manage $50 to $100 each month, don't wait until next year hoping that you'll have extra cash. You want to ride that train of compounding interest as long as possible.” Maximum allowable contribution as of this writing is $18,000, or $24,000 if you are age 50 or older.
7. Will you make charitable contributions in 2016?
If you plan to make charitable contributions in 2016, consider donating long-term appreciated securities instead of cash. You’ll receive a full fair market value deduction and pay no capital gains tax on the securities. Or sell depreciated securities for the tax-deductible loss and then give the cash from the sale to charity.
8. Balance investment gains and losses.
Keep a close eye on your personal investments during the year. By selling appreciated assets and liquidating underperforming investments, you may match gains and losses to minimize your personal income taxes.
If you have sufficient losses to offset your gains, you may deduct the losses on sales completed by December 31. Note, however, that the amount of capital losses that you can use to offset ordinary income is limited to $3,000.
If your net loss totals more than $3,000, you may carry losses over $3,000 forward every year until you use them up.
8. Having a blessed event?
If you’re expecting the stork to visit your house next year, remember to obtain a Social Security number for babies born any time during 2016, right up to December 31. Put the newcomer on your personal tax return to receive the benefits of claiming the child as a dependent or claiming head of household status.
9. Saving for college?
If you’re facing college tuition expenses in the years ahead, a 529 College Savings Plan can help to build your college fund and save on taxes while you’re doing it. Offered by 49 states and the District of Columbia, 529 plans allow a lifetime contribution as much as $250,000 to pay for a child’s college. Contributions compound tax-free and withdrawals are tax-free as long as they are spent for higher education.
10. Consider these other tax adjustments for 2016.
• The standard deduction for heads of household rises to $9,300 for tax year 2016, up from $9,250 for tax year 2015. Other standard deduction amounts—$6,300 for singles and married persons filing separate returns and $12,600 for married couples filing jointly—remain unchanged.
• The personal exemption rises to $4,050, up from the 2015 exemption of $4,000. However, the exemption is subject to a phase-out that begins with adjusted gross incomes of $259,400 ($311,300 for married couples filing jointly). It phases out completely at $381,900 ($433,800 for married couples filing jointly.)
• For participants who have self-only coverage in a medical savings account, the plan must have an annual deductible that is not less than $2,250, up from $2,200 for tax year 2015; but not more than $3,350, up from $3,300 for tax year 2015. For self-only coverage the maximum out-of-pocket expense amount remains at $4,450. For tax year 2016 participants with family coverage, the floor for the annual deductible remains as it was in 2015—$4,450—but the deductible cannot be more than $6,700, up $50 from the limit for tax year 2015.
For family coverage, the out-of-pocket expense limit remains at $8,150 for tax year 2016 as it was for tax year 2015.
Keeping your annual contribution to Uncle Sam to the legal minimum is the smart way to increase those valuable after-tax dollars. Getting an early start on the task and keeping tax reduction in your plans all year long are basic requirements for skillful financial management.