Tax Strategies Franchise Owners Should Be Considering
Tax Strategies Franchise Owners Should Consider
Tax is a critical issue for every company. Just as there are several tax laws, there are also several tax strategies Franchise Owners can execute to ensure they get lower tax liabilities and enjoy more tax benefits. But then, Franchise Owners have different tax planning strategies that they regard as ideal. And sadly, some others totally ignore tax planning, only to fall victim to massive tax liabilities in the future. Since tax planning is an ongoing process, whether you've been planning or ignoring it, here are some basic tax planning strategies you need to consider as a Franchise Owner.
Leverage the Qualified Business Income Deduction
Under the 2017 law, Franchise Owners of sole proprietorships, single-member LLCs, and S corporations can deduct 20% of their business income. This enables you to obtain tax savings on that percentage deducted.
Cost Segregation and Depreciation
Depreciation is a financial technique that allows businesses to count the reduction in property value as a deductible expense. But the bad news is that, for tax purposes, depreciation is calculated across decades, up to 39 years. It would therefore take a long time to see any tax reduction. However, cost segregation is a study that pinpoints any asset that can be depreciated over a shorter time by using accelerated depreciation. And typically, building improvements are common with Franchise Owners as they would want to make some personalized changes to the property. However, Franchise Owners can identify those property improvements that can depreciate rapidly by conducting a cost segregation study, thereby obtaining tax benefits quickly.
Maximize Business Entertainment Expenses
Entertainment expenses are legitimate deductions cut out of your tax bill, thereby providing you tax savings. This may include business meals at a restaurant, etc. However, for it to pass as a legitimate deduction, you must have the entertainment in a place conducive to a business discussion, e.g., a restaurant. Obviously you want to control your expenses and not have “team lunch meetings” every day., but it’s something to keep in mind, if and when you might want to host team building workshops or exercises.
Get a Retirement Plan and Fund it
Retirement plans are a great tax strategy that offers Franchise Owners substantial tax savings just as it is with individuals. If your company is a corporation, you can contribute up to 25% of their income to a tax-deferred plan, e.g., IRA. If you're a sole proprietor, you can put up to 20%.
But you can get even more tax savings by adopting a defined benefit plan rather than those IRAs. However, such defined plans are much more complex. You would need expert assistance to set one up.
Choose a Suitable Accounting Method
Franchise Owners can also obtain tax advantages through the accounting method they adopt. While the cash basis accounting is more straightforward, it's tied to cash flow, and income is therefore taxed immediately. On the other hand, the accrual accounting method may allow businesses to defer tax obligations. As a Franchise Owner, you can do so by delaying sending invoices, thereby slowing down your income. Do this from the 4th quarter to the 1st quarter. Since the income is deferred to the following year, you won't have to pay the tax liabilities until that year. You can also make large purchases as well during this time. Furthermore, an expense taken in the current year may become a deduction against the current income rather than the future one. However, it is crucial to time the income and expenses according to how you expect your income to be in the coming year. For example, if you'd be receiving more revenue next year, then you'd save more on tax if you got your business income now rather than put more tax burden on your personal income later.
These tax strategies discussed above are not exhaustive. However, it's beneficial to consult with a financial advisor to determine what tax strategy would be best suited for your franchise. Start early, plan often, and talk to professionals to learn about what’s available. For those unfamiliar with tax law, or tax strategies in general, it can become a full time job - so make friends with someone who does know. :)
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