Congratulations, taxes are due!

By Jeff Campbell, Senior Vice President – Commercial Banking, Fidelity Bank, Minneapolis

Tax season rarely ranks as anyone’s favorite time of year, but for business owners, a combination of smart planning and reframing what taxes represent can help shift your perspective. After all, the higher the tax liability, typically the greater the profitability. In Simple Numbers, Straight Talk, Big Profits, author Greg Crabtree presents the concept of viewing taxes as a key indicator of how well a business is performing. In my years working with clients, I have seen the benefits of working with an experienced CPA or tax advisor to maximize tax savings and minimize overpayments. Here are a few examples of tax credits and deductions that I see clients making use of, with the advice of their tax pros.

Two credits and a deduction

Tax savings typically come in the form of a deduction or a credit. The implications of deductions and credits are different. Tax credits can, themselves, be taxable, so you will want to work with an expert to determine what makes sense for your business.

First up, a deduction: At Fidelity Bank, many of our clients are in manufacturing. Growth often means investing in new equipment. Did you know that investing capital in your business can lower your tax bill? Section 179 of the tax code allows businesses to deduct the total purchase price of qualifying equipment purchased and placed into service during the tax year. That means that if you acquire a piece of qualifying equipment, you could deduct the total purchase price, up the $1,080,000 limit.

Next, a credit: The employee retention tax credit was first introduced as a pandemic era policy and has since been updated. Even if you took a look at it in earlier years, it could be worth a second review as more organizations are eligible under the current rules. Because this is a credit, be prepared for some additional calculations on what you owe. This is definitely one to work on with your tax pro.

Another credit: The research and development tax credit is another one that is popular with our manufacturing clients. Whether you are developing a new part to streamline your operations or a new product for the marketplace, the work that goes into these projects may qualify.

I have seen several other tax savings strategies for businesses with unique circumstances. For those businesses that own buildings, a cost segregation study can also lead to savings on your tax bill by assigning shorter depreciation schedules to furnishings and fixtures, while using the standard 39-year depreciation period on the commercial building. Business owners may also see business or personal tax savings from certain types of retirement investments. This is an excellent topic to discuss with your financial advisor and tax accountant.

Regardless which of the tax strategies above apply to you, the businesses that I work with that are most prepared when it comes to tax time have fundamentally sound internal accounting practices and good business projections that enable them to make decisions and undertake efficient tax planning. Strong financial leadership, whether through a fractional CFO, an external advisor, or an in-house expert, is critical to making smart tax decisions. After all, no one wants to get on the wrong side of the IRS.