Year End Tax Planning Tips for Business Owners
The end of the year is an optimal time for tax planning, especially for business owners. However, year end also coincides with the busiest season for many businesses and tax planning often falls to the bottom of the to-do list as a result. That’s why I’ve put together this quick list of year end tax planning tips for business owners. If you are a business owner looking to take advantage of tax planning before December 31st, then keep reading!
Decide on a Salary and Dividend Mix
As the owner of an incorporated business, you can choose to pay yourself in the form of a salary or dividend. These remuneration decisions usually have to be finalized by December 31st.
If a salary is chosen, the corporation can claim a deduction for the amount paid resulting in lower corporate taxes. As the recipient, you include the salary in your personal tax return.
If a dividend is chosen, the corporation may receive a credit for a portion of the dividends paid in some cases. As the business owner, you include the dividend income in your personal tax return. The personal tax rates on dividends are generally lower those paid on a salary.
So how do you choose between a salary and dividend?
Well, it depends!
Many factors, both tax and non-tax related, will influence your decision.
For example, a salary may be the better choice if your corporation nets more than $500,000 of active business income. This is because income above this threshold is taxed at a higher rate and paying a salary can help the company stay below this limit.
It is also important to consider your personal goals when making a decision:
For example, perhaps you have plans to purchase a home next year and require a mortgage. As a business owner, you have the opportunity to choose an amount and type of remuneration which puts you in a better position to obtain a mortgage.
As both a CPA and mortgage professional, I am well versed in mortgages for business owners. I can work with you to develop a remuneration plan that considers both your mortgage and tax needs. Contact me if you want to learn more.
So, here’s the bottom line…
Your salary and dividend mix will change from year-to-year as your situation changes. Be sure to speak with an accountant who understands your current needs.
Income Splitting with Family Members
If you have family members in lower tax brackets, then there may be an opportunity to shift income into their hands and pay less tax overall as a family unit.
Often small business owners will enlist family members to help in the business. In this case, you can consider paying family members a reasonable salary for their services.
If family members are also shareholders, then it may be possible to pay them a dividend.
But be careful when paying dividends…
In recent years, tax rules have been put in place to restrict the ability to pay dividends to family members unless certain conditions are met. It is important to discuss these complex rules with a tax professional before proceeding.
Accelerate the Timing of Business Expenses
Do you anticipate large upcoming business expenses or asset purchases in the New Year?
If so, consider accelerating these expenditures to occur prior to December 31st. This will allow your business to receive a tax benefit for these expenses sooner rather than later.
Tax-Loss Selling
Tax-loss selling, also known as tax-loss harvesting, is a strategy that allows businesses with an investment portfolio to trigger a capital loss on investments trading below their original cost.
Triggering capital losses before the end of the year will allow the business to offset capital gains incurred in the year and reduce its taxes. Also, unused capital losses can be carried back to the previous three tax years or carried forward indefinitely.
If your business holds an investment portfolio that incurred large capital gains in the current or past three years, then this strategy can be beneficial.
A word of caution…
Before implementing this strategy, it is important to check the balance in your corporation’s capital dividend account (CDA). The CDA allows corporations to pay tax-free dividends to its shareholders. Capital losses will decrease the CDA and, hence, reduce access to these tax-free funds.
Donation Planning
Does your business have plans for charitable giving?
If so, consider accelerating these donations to occur prior to December 31st to receive a tax deduction in the current year.
For an even larger tax benefit, if your business holds an investment portfolio, then consider donating investments “in-kind” as opposed to cash.
When securities which have appreciated in value are donated in-kind, a special tax rule allows the capital gain on the donated securities to be reduced to zero. This means your business benefits from both a tax deduction and eliminating capital gains tax on the security being donated.
Talk about a win-win situation!
And that rounds up our list of year end tax planning tips for business owners.
Want to learn more about how you can take advantage of tax planning as a business owner? Book a consultation with us today.
The content of this blog is intended to provide a general guide to the subject matter. Professional advice should be sought about your specific circumstances.
