Believe it or not, there are some important last-minute tax strategies to consider before filing. Even if you aren’t reading this article the week before that important April deadline, there are some important ideas to consider.
Most importantly, keep reading and don’t fall prey into thinking that your tax return ‘is what it is’ and there isn’t something you can do to improve your tax situation.
Now if you are actually reading this before the first filing deadline, remember this year in 2018 that deadline is Tuesday, April 17th. But as you probably just noticed, I emphasized the word ‘first’, because my first last-minute tax strategy is to consider an Extension.
So, since time is of the essence and we are up against the clock, let’s jump into my top 4 “Last Minute Tax Strategies”.
File an Extension. That’s right, don’t stress! If you aren’t ready to file your tax return, take the extra time and file an Extension. Why rush and miss something? With the extra time, you can gather your records, search for extra deductions and let it simmer. Just like a good stew, the longer it simmers the better it gets.
Many don’t realize that you also reduce your chances of an audit by filing a tax return. Yep, the IRS generally works on a ‘first come first serve’ basis when it comes to assigning audits each year. The IRS computer systems start flagging tax return issues and questions immediately with the tax returns that are filed first and then issues its line item audit letters and examinations based on what’s available to scrutinize. Again, simple statistics over the years have shown that the later you file the less chance of an audit.
Now, also remember that an Extension to file is NOT an extension to pay. You still need to ‘estimate’ what you think you may owe (if anything) and send in the dough with your Extension. Read here on how you can do some simple math on how to calculate what you might owe.
If you want to file an Extension it’s completed on Form 4868. You can learn more about the process and download the Form here.
Maximize the Underutilized Deductions. There are several HOT deductions that many taxpayers don’t consider and just ‘leave money on the table’. Now, I realize that some of you may not consider these ‘last minute’ write-offs…HOWEVER, I think these are at the least important last minute ‘considerations’.
As such, make sure scour your bank statements, comb through your piles of receipts, and examine credit card statements, emails, and calendar for expenses that might help you increase the write-offs against your small business. Here are 6 underutilized write-offs that in my opinion should be a healthy line item on any legitimate small business tax return:
- Travel. Assuming the trip is entirely for business, the good news is that all of those travel expenses are 100% deductible. Think of airfare, train or any public transportation, Uber, Lyft or taxi, rental car and gas, hotel, Airbnb or Vrbo, valet, tips and parking, etc.. Just make sure your 2017 trips had a business purpose and comb go all of your records to maximize this write-off.
- Dining. Yes, dining out has been a confusing matter after the TCJA, but meals for 2017 are still the same and lots of potential for write-offs. It’s a 50% deduction for meals while traveling and dining out with clients or prospects, so don’t ignore this deduction. Also, it’s a 100% write-off for all of those in office meetings, and food in the kitchen and fridge for the employees. Dig up every expense!
- Entertainment. Well in 2018 entertainment expenses are no longer a write-off, BUT they are still ripe for the picking in 2017. This includes any golf, spa, theatre, sporting events, or ANY entertainment expense where a constructive business meeting occurred with a prospect, client, employee or business partner. Don’t leave any of these expenses on the table!
- Home office. There are several strategies on how to maximize the Home Office Deduction. In fact, there was a new strategy released by the IRS in 2014 and provides a wonderful basic and simple option for almost every business owner. Also, if you have an S-Corporation you can still ‘book’ rent as an expense on your 2017 tax return and it doesn’t have to be claimed as income by you on your personal return.
- Electronics. Many taxpayers underestimate the opportunity to write-off electronic expenses such as computers, TV’s, smartwatches, cameras, and maybe even a drone if needed. Also, don’t forget cell phone expenses for you AND your family members serving on the Board of Directors or as employees. Read here for an excellent article on the topic.
- Auto. 90% or more of my clients are using the ‘mileage method’. Now, I realize you may not have kept the best records in 2017, but do your best to be honest and ethical and ‘go back in time’ to create the best log you can of business mileage. You’re allowed to deduct 53.5 cents per mile in 2017 for any business trips, errands, and client meetings. Also, if you purchased a truck or SUV in 2017 it’s critical you run through the numbers and determine if mileage or actual is the best method for your write-off.
Contribute to a Health Savings Account (HSA). You have until April 17th to cash in on a killer write-off taken right on the front page of your tax return. The HSA is one of the most powerful pieces of a well-designed health care strategy. It includes saving money, saving taxes, building a tax-free ‘bucket’ for health care and most importantly taking control of your own health care strategy.
- You save money because in order to have an HSA, you have to have a ‘high deductible health care plan’. Well, chances are you will have a lower premium with a higher deductible and save money.
- You save taxes because you get a tax deduction when contributing to your HSA, right on the front page of your tax return.
- You build a ‘tax-free bucket’ of money in an HSA, just like an IRA. The money can be invested and the growth is tax-free and withdrawals for health care are tax-free.
- Finally, you take control of many health care decisions because you can pay cash out of your HSA. Imagine that! No insurance company between you and your healthcare provider where you can control your care and negotiate for lower prices. Even the doctor’s win!
Remember, the insurance is completely separate. Get the right type of insurance that qualifies you and then DON’T CALL your insurance company for a Health Savings Account…they don’t administer them- they just sell insurance. Once you have the insurance, the easiest is to open up an HSA at your local bank. You can sometimes even do it within minutes online. No major paperwork. Just check the proper boxes, sign the form and make a deposit. Most Bank HSAs will then give you a Visa card to pay for medical expenses right out of your HSA. However, if you want to ‘let the money ride’ and invest the HSA and not pull out money for medical expenses immediately- for example, “self direct” (see item 5 above), then you would open up your HSA with a self-directed IRA custodian. At our law or accounting office, we can give you a list of choices. Read here for an article with more details to help you guide through the options of an HSA.
Contribute to an Individual Retirement Account (IRA) or SEP. Again, this is another deduction you can take advantage of after December 31st, but before you file your tax return. The IRA (whether a Roth or Traditional) is an option before April 17th, while the SEP is a business owner’s option before they file on extension depending on what type of business they have.
An IRA is a fantastic way to start saving for retirement. We as Americans could do a lot more to take action and increase our savings rate. Even if it was just a few hundred dollars a month, it could make a big difference on your tax return, and in the long-run when it comes to retirement. Here are just a few of the benefits:
- With a Traditional IRA, in 2018 you can deduct up to $5,500 per individual and $6,500 if you are over age 50. However, there are contribution deduction limits based on your income and whether or not you or your spouse is covered under a retirement plan at work. Read more here on the deduction limits.
- The Roth IRA also has some unique provisions. You can still contribute 5,500 per individual, and $6,500 if you are over age 50, but you might be limited if you make too much money. Those limits are x in 2018. However, all is not lost. There is a strategy called the ‘backdoor Roth IRA’ that allows you to still create a Roth through a conversion process, not a contribution process. Read more here on how to have your cake and eat it too.
- Both the Traditional and Roth can also be ‘self-directed’ and invested in what you know best. This is a classic example of something Wall Street doesn’t want you to know and I explain it in my book “The Business Owner’s Guide to Financial Freedom- What Wall Street Isn’t Telling You”.
- Finally, if you ever create a 401k or SEP, you can actually role the traditional IRA money into these larger buckets in order to pool money for better investment strategies.
If you are self-employed you can bypass the whole IRA strategy and go straight to the SEP. This type of plan allows you to deduct up to 25% of your business net income (up to $54,000 in 2017) and take a tax deduction on the front page of your tax return. You can still self-direct it and build for retirement much more quickly than with an IRA.
Your deadline is also extended and is determined by your company’s tax filing deadline. If you are filing as an S-Corporation, you have until September 15th, 2018, but if by chance you are filing as a sole-proprietorship (LLC or not), you have until October 15th in 2018.
However, the SEP certainly has its problems. You can’t have a Roth SEP (no such thing exists), so if you want a Roth IRA, you have to actually use that type of IRA account. Moreover, I have often called the SEP strategy the: “I screwed up and didn’t do a 401k account”. This is because the SEP is highly inefficient when it comes to saving on FICA tax and maximizing your retirement savings deduction. The actual tax savings is enormous when you consider a 401k/S-Corp strategy, compared to that of an LLC/SEP strategy. Here is a video on that particular topic you mind find shocking as well as helpful:
In summary, don’t give up on working, scrapping and otherwise brainstorming for more deductions on your tax return. Don’t presume that everything is accurate you read on the web, or that your accountant is all-knowing and all-powerful when you question their advice and strategies. I’m constantly looking for ideas, willing to learn and open to being second-guessed. Do your homework and get a second opinion if you don’t like the way things are adding up.
Mark J. Kohler is a CPA, Attorney, Radio Show host and author of the new book “The Business Owner’s Guide to Financial Freedom- What Wall Street Isn’t Telling You” and “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP. For more information visit him at www.markjkohler.com.