Smart Tax Strategies
Year-end planning could make taxes easier
By Mark E. Battersby
Originally published in Skin Deep, September/October 2009. Copyright 2009. Associated Skin Care Professionals. All right reserved.
As the end of the year approaches, many skin care professionals find themselves caught between the proverbial rock and hard place. The uneven economy is placing pressure on everyone--skin care and spa businesses alike--to continue cutting costs, including taxes.
Scheming to keep a tax bill for a skin care professional or spa at a minimum is neither illegal nor a bad thing. Despite the increased scrutiny faced by many businesses and the complexity of our tax laws, tax planning itself does not have to be overly difficult. What better time than now to begin thinking about keeping your 2009 tax bill to its legal minimum?
Basic Planning Strategies
Depending on individual circumstances, there are a number of legitimate strategies any esthetician can undertake before year's end to help them remain in the same tax bracket this year, next year, and for many years thereafter. Following are some basic year-end savings strategies.
Update Your Accounting. An important part of any year-end tax strategy is to have a good understanding of the skin care operation's financial situation. Extra time spent now bringing books up to date will make your situation clearer. It is also a good first step in year-end tax planning.
Defer Income. Delay year-end billings or processing of credit card receipts until late enough in the year that payments will not come in until the following year. The taxes on every dollar deferred until January 2010 will not be due until April 2011.Naturally, any deferral strategy will depend on your profit and losses for the year and the legal structure of your business (corporation, limited liability company [LLC], partnership, and so forth). Depending on your income tax rates in the foreseeable new year, deferral of income can make the best sense for many LLCs, partnerships, S corporations, and sole proprietors.
Increase Expenses. Purchasing items required in the skin care or spa operation now will maximize deductions for this year. If you see a need for goods and services in the first quarter of the new year, buy them now, if cash flow permits.
Accelerate Payments. Wherever possible, prepay deductible business expenses, including rent, interest, taxes, insurance, and so forth. Many skin care professionals, salons, and spa businesses, especially those using the cash method of accounting, can legitimately prepay some business expenses. With the cash method of accounting, most expenses are deductible in the year they are paid. All that is required may be a business purpose for the prepayment (for example, locking in a price, anticipating a scarcity, and so forth).
Inventory Writeoffs. Many salons and spas maintain (or should) inventory of both supplies and products to be sold to customers. Depending on the accounting method used, a check of inventory for damaged goods or those that are obsolete can mean a drop in the market value, and added deductions.
Planning Profits
Our tax system has graduated tax rates that increase along with the income of the esthetician and his or her business at various levels. Thus, one strategy for saving taxes means reducing your tax bracket or that of the business.
The owners of many closely held, incorporated businesses have traditionally tried to extract funds in the form of compensation, rather than as dividends. They now have a new option to plan for: compensation will still receive a corporate-level tax deduction while dividends will not. Compensation will however, continue to be taxed at rates as high as 35 percent at the individual level, while dividends will now be taxed only at 15 percent.
One planning strategy might involve finding some method other than compensation to reduce the incorporated salon or spa operation's tax bill--retirement plan contributions and interest deductions are two options. This simple strategy, combined with a return to paying dividends to shareholders, might offer the best of both worlds. And, yes, such strategies are legal.
By beginning the tax planning process now, many estheticians and skin care business owners can legitimately deduct benefits that would otherwise be classified as nondeductible personal expenses. No skin care professional or business owner should, for instance, overlook the possibility of purchasing health insurance, investing for retirement, or providing perks like a car through the business. But perks, particularly those that benefit the owner of a closely held business or operation, require advance planning.
Business Entities
Although year-end signals the last chance for an esthetician or salon owner to balance the timing of income and deductions between the current and upcoming year for maximum tax advantage, there are also strategies that can be implemented early next year.
For example, if income is up this year but is expected to be down next year, a skin care professional might want to postpone asset sales or other unusual transactions that might generate a profit until 2010 when additional profits will not be quite as likely to put their operation into a higher tax bracket.
Naturally, what any esthetician can do depends a great deal on the accounting method used by the operation. A cash-basis operator or business generally deducts expenses as paid and receipts become income when received. An accrual-basis salon or spa business realizes income when billed, and expenses when incurred--regardless of when they are paid.
Year-end tax planning should also include a review of your current form of doing business. Many estheticians or business owners have discovered that another form would be more beneficial. Taxes are only one consideration when it comes to a business entity. With certain exceptions, a corporation operating as an S corporation does not pay federal corporate income taxes. Instead, S corporate income, losses, deductions, and credits pass through to the owners to be reported on their tax returns. Thus, S corporation income generally is taxed only once (to the shareholders) unlike regular C corporation income, which is taxed twice (once to the corporation and again to the shareholder as dividend income). Dividends paid from an incorporated skin care business are temporarily taxed at a rate of only 15 percent.
Like a corporation, an LLC provides its owners with protection from personal liability for business debts and obligations. But most LLC owners can choose to have their businesses treated as partnerships for income tax purposes. This means:
-Credits, deductions, income, and losses pass through to the individual owners to be reported on their individual income tax returns.
-LLC income is not subject to double taxation.
-An LLC can specially allocate income and expenses among its owners to the same extent that a partnership can.
Thanks to the so-called "check-the-box rules," some skin care professionals can select the type of business entity they wish to be treated as right on the tax return. The best time to think about this is now, before the end of the year. The advice of a tax professional is advised.
Planning to Plan Now
Although the Internal Revenue Service may occasionally disagree, every skin care professional should keep in mind that the courts strongly back a taxpayer's right to choose the course of action that will result in the lowest legal tax liability. Tax planning, therefore, is a process of looking at various tax options in order to determine when, whether, and how transactions should be handled so taxes are reduced or even eliminated.
Tax planning should not be the primary motivation for any transaction. In other words, the strength of every business transaction must stand on its own, aside from any tax benefits that may result.
Now is a good time to book a tax planning meeting with your accountant or tax professional.1 Professional help devising a year-end tax saving strategy for your skin care operation will ensure a lower tax bill when the tax returns are filed--as well as lower tax bills for many years to come.
1 See page 30 for information on your H&R Block discounts.
Mark E. Battersby is an author, lecturer, and tax and financial writer in Ardmore, Pennsylvania. His columns, features, and reports have appeared in leading trade magazines and business journals. He is the author of four books.
As the end of the year approaches, many skin care professionals find themselves caught between the proverbial rock and hard place. The uneven economy is placing pressure on everyone--skin care and spa businesses alike--to continue cutting costs, including taxes.
Scheming to keep a tax bill for a skin care professional or spa at a minimum is neither illegal nor a bad thing. Despite the increased scrutiny faced by many businesses and the complexity of our tax laws, tax planning itself does not have to be overly difficult. What better time than now to begin thinking about keeping your 2009 tax bill to its legal minimum?
Basic Planning Strategies
Depending on individual circumstances, there are a number of legitimate strategies any esthetician can undertake before year's end to help them remain in the same tax bracket this year, next year, and for many years thereafter. Following are some basic year-end savings strategies.
Update Your Accounting. An important part of any year-end tax strategy is to have a good understanding of the skin care operation's financial situation. Extra time spent now bringing books up to date will make your situation clearer. It is also a good first step in year-end tax planning.
Defer Income. Delay year-end billings or processing of credit card receipts until late enough in the year that payments will not come in until the following year. The taxes on every dollar deferred until January 2010 will not be due until April 2011.Naturally, any deferral strategy will depend on your profit and losses for the year and the legal structure of your business (corporation, limited liability company [LLC], partnership, and so forth). Depending on your income tax rates in the foreseeable new year, deferral of income can make the best sense for many LLCs, partnerships, S corporations, and sole proprietors.
Increase Expenses. Purchasing items required in the skin care or spa operation now will maximize deductions for this year. If you see a need for goods and services in the first quarter of the new year, buy them now, if cash flow permits.
Accelerate Payments. Wherever possible, prepay deductible business expenses, including rent, interest, taxes, insurance, and so forth. Many skin care professionals, salons, and spa businesses, especially those using the cash method of accounting, can legitimately prepay some business expenses. With the cash method of accounting, most expenses are deductible in the year they are paid. All that is required may be a business purpose for the prepayment (for example, locking in a price, anticipating a scarcity, and so forth).
Inventory Writeoffs. Many salons and spas maintain (or should) inventory of both supplies and products to be sold to customers. Depending on the accounting method used, a check of inventory for damaged goods or those that are obsolete can mean a drop in the market value, and added deductions.
Planning Profits
Our tax system has graduated tax rates that increase along with the income of the esthetician and his or her business at various levels. Thus, one strategy for saving taxes means reducing your tax bracket or that of the business.
The owners of many closely held, incorporated businesses have traditionally tried to extract funds in the form of compensation, rather than as dividends. They now have a new option to plan for: compensation will still receive a corporate-level tax deduction while dividends will not. Compensation will however, continue to be taxed at rates as high as 35 percent at the individual level, while dividends will now be taxed only at 15 percent.
One planning strategy might involve finding some method other than compensation to reduce the incorporated salon or spa operation's tax bill--retirement plan contributions and interest deductions are two options. This simple strategy, combined with a return to paying dividends to shareholders, might offer the best of both worlds. And, yes, such strategies are legal.
By beginning the tax planning process now, many estheticians and skin care business owners can legitimately deduct benefits that would otherwise be classified as nondeductible personal expenses. No skin care professional or business owner should, for instance, overlook the possibility of purchasing health insurance, investing for retirement, or providing perks like a car through the business. But perks, particularly those that benefit the owner of a closely held business or operation, require advance planning.
Business Entities
Although year-end signals the last chance for an esthetician or salon owner to balance the timing of income and deductions between the current and upcoming year for maximum tax advantage, there are also strategies that can be implemented early next year.
For example, if income is up this year but is expected to be down next year, a skin care professional might want to postpone asset sales or other unusual transactions that might generate a profit until 2010 when additional profits will not be quite as likely to put their operation into a higher tax bracket.
Naturally, what any esthetician can do depends a great deal on the accounting method used by the operation. A cash-basis operator or business generally deducts expenses as paid and receipts become income when received. An accrual-basis salon or spa business realizes income when billed, and expenses when incurred--regardless of when they are paid.
Year-end tax planning should also include a review of your current form of doing business. Many estheticians or business owners have discovered that another form would be more beneficial. Taxes are only one consideration when it comes to a business entity. With certain exceptions, a corporation operating as an S corporation does not pay federal corporate income taxes. Instead, S corporate income, losses, deductions, and credits pass through to the owners to be reported on their tax returns. Thus, S corporation income generally is taxed only once (to the shareholders) unlike regular C corporation income, which is taxed twice (once to the corporation and again to the shareholder as dividend income). Dividends paid from an incorporated skin care business are temporarily taxed at a rate of only 15 percent.
Like a corporation, an LLC provides its owners with protection from personal liability for business debts and obligations. But most LLC owners can choose to have their businesses treated as partnerships for income tax purposes. This means:
-Credits, deductions, income, and losses pass through to the individual owners to be reported on their individual income tax returns.
-LLC income is not subject to double taxation.
-An LLC can specially allocate income and expenses among its owners to the same extent that a partnership can.
Thanks to the so-called "check-the-box rules," some skin care professionals can select the type of business entity they wish to be treated as right on the tax return. The best time to think about this is now, before the end of the year. The advice of a tax professional is advised.
Planning to Plan Now
Although the Internal Revenue Service may occasionally disagree, every skin care professional should keep in mind that the courts strongly back a taxpayer's right to choose the course of action that will result in the lowest legal tax liability. Tax planning, therefore, is a process of looking at various tax options in order to determine when, whether, and how transactions should be handled so taxes are reduced or even eliminated.
Tax planning should not be the primary motivation for any transaction. In other words, the strength of every business transaction must stand on its own, aside from any tax benefits that may result.
Now is a good time to book a tax planning meeting with your accountant or tax professional.1 Professional help devising a year-end tax saving strategy for your skin care operation will ensure a lower tax bill when the tax returns are filed--as well as lower tax bills for many years to come.
1 See page 30 for information on your H&R Block discounts.
Mark E. Battersby is an author, lecturer, and tax and financial writer in Ardmore, Pennsylvania. His columns, features, and reports have appeared in leading trade magazines and business journals. He is the author of four books.
