When I first launched Outlook this morning I was greeted with a reminder that I’d just as soon forget – tax time is coming.
Because I deal with so many new/growing web development groups in my consulting practice, I spend lots of time talking about taxes, tax reduction, corporate entities, and bookkeeping. I’ve come to enjoy this because so many of our clients can get major tax advantages simply by employing some basic bookkeeping and tax reduction techniques. We also make an effort to improve our own tax situation each year, which helps us to manage growth and preserve our profits as the business grows.
This year is no exception. While we expect to pay more taxes than ever in actual dollars, I am hoping to reduce the percent of net profits that we pay in taxes if at all possible. Around this time last year we added three new ingredients to the tax-reduction mix:
1) Health Savings Accounts
2) Individual 401k’s for principals
3) Conversion to American Express for all expenses
The Health Savings Account (HSA) is a relatively new form of health care plan in the US, and is not to be confused with the older MSA or FSA systems. The HSA allows the employer to fully-fund a savings account for the employees, so long as the employee is covered by an HSA-compatible health plan. The plan is required to have a ‘high deductible’ which is typically between about $1000 and $5000. The savings account is used to pay the deductible, but the rules for its use are quite liberal and it behaves much like an IRA if not used. The premiums are dramatically reduced (very helpful if you are the employer) and the savings plan need not be used unless necessary for medical purposes (very helpful if you are the employee). Best of all, the contribution to the HSA is tax-deductible regardless of whether the funds are used. A variety of rules apply, but most CPA’s agree that the HSA is a great deal for many healthy business owners. I strongly recommend that you look into it if you think you might qualify.
Individual 401k’s are similar to ordinary 401k’s, but with special rules. The most interesting part is that you can contribute much more to an individual (or ‘solo’) 401k – sometimes over $40,000 per year. However, it’s only available to small businesses in which the employees are owners. In our case, all of the employees are part owners (the rest are contractors) so this works well. Again, there are many details to this kind of plan and your CPA can advise as to the best retirement system for you.
The conversion to American Express was simply for bookkeeping ease. Statistics show that even the best bookkeepers make mistakes, and mis-categorization of expenses is a frequent means of missed tax-deductions. AMEX downloads and integrates gracefully with QuickBooks and each transaction includes a human-readable text description of the transaction details. This will be a big improvement over the sloppy-download that our current bank offers, and it will be easier for our bookkeeper to categorize transactions which is good for the bottom line.
The next step is to turn over the 2006 books to our CPA and wait to see how much these techniques pay off. Once the corporate books are complete, we’ll have the same CPA prepare the personal tax returns for each principal of the company. This allows him to use a comprehensive approach which incorporates our corporate and personal returns as well as our retirement and investment strategies.
Although many of our clients insist upon doing their own taxes, we generally recommend against this. There are always exceptions, but most people who think they are optimizing their taxes on their own will save money by having a seasoned professional handle their accounting. With the effect of compounding interest, saving a thousand dollars per year in taxes can make a huge difference over 10 years, and the time and energy required to stay on top of the tax laws is best left to professionals.
Almost every business can find some way to reduce their taxes each year. Obviously the above items are techniques that would pertain to a US-based company, especially numbers 1 and 2. Most countries, however, offer some type of similar mechanism for reducing taxes. The most important thing is to do your research and locate every possible tax advantage you can in your home country, and hopefully share your best tips right here.