With most of my clients being small business owners and as the owner of a small business myself, I understand firsthand the desire to constantly be looking to either maximize cash flow or the net worth of our businesses. Since 2015 is almost upon us (seriously where did 2014 go???) that means that the tax deadlines of March 15th or April 15th are right around the corner. Therefore it is prudent for every owner to be aware of, and potentially perform more research on, year-end money moves that might save themselves some profits. Let’s call it a holiday bonus that owners give themselves. While potential savings are always subject to restrictions and rules, owners would be wise to look into the below options and discuss them with their CPA over a glass of eggnog in order to ensure that they are not leaving money on the table.
The first tip is relatively simple. If you are an owner or an employee with a “high-deductible health plan” (HDHP), you might consider opening and funding a Health Savings Account (HSA). While an HSA covers many of the same expenses as the Flexible Spending Account (FSA), the HSA does not need to be used up from year to year and, very importantly, it is not subject to income phase-outs for high earners. Assuming a person is eligible, contributions to the HSA are an “above-the-line” deduction on a tax return. One important consideration is that the HSA has to have been opened before the medical (or most dental or vision, etc.) cost is incurred. However if you are considering having a “qualified” procedure done in the near future anyway, you might be able to open up your HSA, put in your contribution, pay the medical expense from your account, then take your contribution off of your 2014 taxes. I have, for example, one client who needs very expensive (not cosmetic) dental work in the next few months. I advised her that since she is already covered under an HDHP, she could open up an HSA today, make her maximum contribution for 2014 to the HSA soon, make her maximum 2015 contribution January 1st, then have the procedure done on January 2nd, for a large tax savings. Even if you don’t have an immediate medical need now, many banks offering HSAs will allow the funds to be invested (think long term here obviously) to be used down the road when the person needs the money for medical expenses. In fact HSAs are seen as such a great tool that in the wealth management industry many advisors are considering them as supplemental retirement accounts. Again, just make sure you perform your own research or work with a qualified advisor when navigating this option as there are lots of rules, pitfalls and exceptions.
A second common tip, while oft-repeated, is one whose power is nevertheless frequently underestimated: set up a work retirement plan. I state that it is often misunderstood because while most comprehend that an employee who contributes say $1,000 to a pre-tax plan will save for example $310 off of their income taxes (assuming a 25% Federal tax bracket and 6% state income tax bracket), few business owners realize that any company match that their business makes to employees doesn’t incur payroll taxes on the business side. The company match, therefore, is a great way to guarantee that more of an owner’s hard-earned money is going directly to reward their employees instead of to the IRS. The issue, however, is that some plans have to be set up before the calendar year-end while others can be set up as late as the due date of your tax return. Still others have deadlines that for 2014 have already passed. Additionally, retirement plans can have strict and complicated rules, so you’ll want to retain expert advice on this one for sure. The savings, however, can definitely be worth the cost.
The last tip is an offshoot of the second and it is my personal favorite. It is so relatively obscure that I have enjoyed sharing this little tidbit of savings advice with some of my clients’ CPAs in the past. What should a small business owner do if they don’t have a retirement plan in place? The answer: act fast. The reason? They could benefit from the Credit for Small Employer Pension Plan Startup even if the plan doesn’t go into effect until next year. Yup, you read that right. If your business qualifies you could receive a tax credit (for 50% of the qualifying costs, up to $1,000 in costs per year) for the first three years of the plan, and again that first year could be counted as this year even if the plan doesn’t start until 2015. However, due to the fact that some retirement plans are quite complicated and can have a long lead time, you’d better get started if you are even remotely thinking about a plan for Jan 1 of 2015. Also, this is another one of those areas where expert help to navigate the myriad rules is probably required.