By David Bosses and Doug Baxter, Prosper Group
The deadline for filing business tax returns is fast approaching. It is important for agency owners to do a quick check to make sure you are being both tax efficient and tax compliant in your submissions. Most agency owners don’t have backgrounds in finance. So, it means you must be extra diligent in managing the administrative tasks that come with running a company, especially in today’s tax climate.
Remember that many of the tax laws have changed in the last few years. Make sure you are not missing a potential savings or leaving yourself open to issues with the tax authorities.
Our mission at Prosper Group is to help agency owners achieve the most value from your companies. Smart tax planning can help improve your cashflow and assist you in developing future growth in your agency.
Here are three things to consider this tax season:
1. Make sure you have familiarized yourself with Section 199A.
This can determine your hiring strategy in relation to the number of full-time and contracted staff you should employ at your agency.
Section 199A in the new tax law offers a big perk for small businesses. Whether it helps a lot or a little depends on how your agency operates. Section 199A gives taxpayers deductions for qualified business income. This applies to qualified businesses that operate solely through a “pass-through” entity -- essentially, a business structure used to reduce double taxation effects.
The main benefit of Section 199A is the 20% deduction that agency owners can take on income. For some, like consultants, the law caps the benefit.
Today, most agencies, regardless of size, operate as a blend of full-time employees and contractors. Some of the Section 199A benefits are a function of the wages paid to W-2 employees.
Wages are not the only factor that affects Section 199A eligibility, though, so talk to your accountant.
2. Look for ways to take advantage of the R&D tax credit.
The R&D tax credit — officially known as the Credit for Increasing Research Activities — allows a qualified business with qualifying research expenses to apply up to $250,000 of research credit against your payroll tax liability and potentially offsetting your AMT liability! This is an added incentive for you to build a more future-facing agency.
While the R&D tax credit is federal, some states have adopted similar programs.
To qualify for the R&D credit, your agency has to be “experimenting” with technology with a qualified purpose. Basically, this includes any time your agency is investing resources and devoting time to:
- R&D that is technological in nature that provides results you intend to use to develop a new or improved business component
- R&D that must be elements of a process of experimentation relating to a new or improved function, performance, reliability, or quality
Initiatives that may qualify include building your own technologies (such as CRM, databases, marketing automation) or developing tools to capture unique analytics. So, investing in these innovations will not only lead you to the front of the pack, but can be a good tax strategy, too. Prosper Group advises all of our clients that this is a good investment. The “Agency of the Future” will be built on data.
The credit is also beneficial for those of you in tech-heavy niches — like VR or AI. But, let’s be honest. Almost every agency is going to devote some staff time to, at the very least, customizing out-of-the-box software, analytics or social media solutions.
3. Partner with a tax strategist, not just an accountant.
Accountants and bookkeepers are essential for seamless day-to-day operations, but they are not strategic advisors.
A tax strategist can help organize your financial operations in the most tax-efficient manner. It will help you take advantage of all available benefits and extract the maximum value from deductions throughout the year.
For these purposes, a tax strategist
is a CPA who specializes in helping businesses design and initiate strategies ahead of time, as opposed to a tax preparer
who handles records of financial decisions made by a business owner throughout the year.
A tax strategist can help you with both tax planning and preparation. Think of this as two sides of the same coin. By planning ahead and developing a tax strategy upfront, you’ll be in the best position possible to minimize your tax obligations allowing your business to thrive.
It’s not as easy as “1, 2, 3” since each requires research, planning and appropriate actions, typically with the advice of an expert. Manage the tax obligations of your firm as well as you manage everything else. And, start now (if you haven’t already) planning for next year.
Developed by David Bosses and Doug Baxter, partners at Prosper Group.
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Tax Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.
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Circular 230 Disclosure: Pursuant to recently-enacted U.S. Treasury Department Regulations, we are now required to advise you that, unless otherwise expressly indicated, any federal tax advice contained in this communication, including attachments and enclosures, is not intended or written to be used, and may not be used, for the purpose of: (i) avoiding tax-related penalties under the Internal Revenue Code or; (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein