Personal Finance

Last-minute tax tips for entrepreneurs in 2016


If you run a small business, now is the time to shore up your finances and take advantage of available deductions to cut your tax bill.

Bear in mind, you're wrapping up this year's books. Advisors say it's too early to see how the Trump administration will shape the tax regime in 2017.

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"For 2016, we can play by the rules we have available to us now," said Gavin Morrissey, managing partner at Financial Strategy Associates in Needham, Massachusetts. "Small-business owners should re-evaluate things in 2017, once we know the new tax rules under Trump."

Though the end of the year is a good time for even regular 9-to-5 employees to do some tax planning, it's especially critical for owners of small businesses. In part, that's because entrepreneurs are responsible for paying their estimated state and federal taxes on time.

They're also on their own when it comes to setting up and funding their retirement plans in a timely fashion.

"Take the end of the year to clean up your books, reconcile your cash, and when you are ready to talk about taxes, we can do so intelligently," said Dave Burton, a certified public accountant at Burton & Company in Hollywood, Florida.

Here are a few suggestions that will get you through the last few weeks of the year.

Know what you owe

In a perfect world, entrepreneurs would pay their estimated state and federal taxes, including Social Security and Medicare levies, on a quarterly basis. In reality, it's easy to overlook these payments, especially if your cash flow is hard to predict.

Since quarterly taxes for the final three months of 2016 are due on Jan. 15, take the time to make sure you've properly deducted the levies and that you're accounting for any late fees and penalties the IRS may impose if you missed a payment.

Working with a payroll company can also help you simplify things. "Let's say you were supposed to pay $10,000 throughout the year," said Burton. "You can go to the payroll provider, have them deduct the $10,000 and pay it to the IRS as additional withholding."

Set up your retirement plan

Once you've determined what you owe in taxes, think about how you can save.

While most folks may know that a 401(k) or an IRA will allow you to save on a tax-deferred basis, did you know that you can also save on taxes by setting up a retirement plan?

Contributions you make as an employer to a SIMPLE IRA, a SEP IRA, or a solo 401(k) are tax deductible.

Be aware of the differences between these three retirement plans. If you are your own boss with a SIMPLE IRA, you can save up to $12,500, plus a catch-up contribution of $3,000 if you're 50 and older. You can also contribute either a 2 percent fixed contribution or a 3 percent match.

You can save even more aggressively in a SEP IRA and a solo 401(k).

Because you're the employer and the employee of your small business, you can save up to the overall limit for defined contribution plans: 25 percent of your earnings, up to $53,000 in 2016, plus a $6,000 for catch-up contribution if you're 50 and older.

That $53,000 includes the $18,000 maximum you can defer into a plan as an employee, as well as other employer contributions and matches.

Talk to your advisor or your accountant to determine which of these plans is right for your business.

Accelerate or defer

Depending on how your clients pay, you may be able to defer receipt of income this year, which could help you save on taxes.

Many sole proprietors use cash basis accounting, meaning you report income when you receive payment.

Consider scheduling your billing so that clients pay you in early 2017 for work you performed in late 2016. This way, you receive the money in the new year.

"Let's say that you provide a service on December 20," said Morrissey. "You can send the bill toward the end of the month, and you won't receive payment until January."

On the other hand, if you had a particularly successful year in 2016, you can try to accelerate deductible expenses.

Whether you choose to hold off on recognizing income or you want to incur costs in these last few weeks will largely depend on whether you're comfortable with these changes to your cash flow.

"Can we spend the money today to get you the deduction, and can you afford to let income pass until 2017?" asked Morrissey.