Businesses are considering how to cut costs or increase prices, and it may feel like there aren’t any good options. Do you lower product quality with a new supplier? Alienate customers with higher prices? Hurt employees with layoffs and wage freezes?
But before you make any painful choices, it’s worthwhile to explore the nooks and crannies of the tax code first.
Indinero CPAs and fractional CFOs are expert tax strategists. In this article, we’ll walk you through 10 advanced tax strategies that you can use to protect your margins. For personalized advice, reach out for a free consultation today.
Lower the Cost of Tariffs Directly
We’re hearing rumors that Chinese suppliers are offering to lie about the country of origin or value of goods on behalf of their American partners. Don’t do that. There are perfectly legal ways to lower the impact of tariffs.
Use “First Sale” Valuation Methods
Sometimes, an item may be sold many times before it arrives in the US. For example, something may have been made in Vietnam, sold to a distributor, and then sold to a final buyer in California for a markup.
The law allows businesses, under certain conditions, to base the value of a product on an earlier sale, rather than the final one. Using this method, the middleman markup wouldn’t be included in the tariff value.
Despite being on the books since 1992, just 2.4% of total US imports are valued using the rule, but that’s likely to change in the coming months.
Review Transfer Pricing Policies
This probably doesn’t apply to the average business owner.
However, corporations importing goods from foreign subsidiaries have the opportunity to mitigate the impact of tariffs by reviewing transfer pricing policies.
To prevent tax avoidance, international law requires related companies to treat transactions as if they were occurring between two independent parties. However, there’s flexibility in setting the price within that framework. Fair market values fluctuate, and auditors generally accept anything within 20% of known industry averages.
A subsidiary might be raising the cost of import duties by rolling auxiliary costs, like marketing or legal fees, into the value of what it sells to its parent company. By reexamining that valuation method, you may be able to declare a lower import price to US customs without crossing any legal lines.
Explore Duty Drawbacks and IC-DISC Classification for Exporters
If you re-export something you’ve paid an import duty on, you can pursue one or both of these strategies:
- Apply for a duty drawback, refunding up to 99% of import fees and taxes.
- Reduce tax liability in general by setting up an Interest Charge Domestic International Sales Corporation (IC-DISC).
IC-DISC details are complicated, but in essence, it’s a legal structure that allows business owners to shift profit from their (high) regular income tax brackets to (lower) qualified dividends.
Reduce Payroll Without Laying Off Employees or Cutting Wages
Businesses split FICA taxes with employees 50/50, but fringe benefits are exempt for payroll tax purposes. Saving your 7.65% portion of FICA may sound marginal, but tariffs on most countries are only 10% right now. Every bit adds up.
For example, you could save on your portion of FICA by shifting employee compensation to any of the following categories:
- Retirement plan contributions
- Tuition reimbursement
- Adoption and dependent care assistance
- Health insurance contributions
- Business expense reimbursement through IRS-approved plans
- Section 125 Cafeteria Plans
- Commuter benefit plans
People would probably prefer to get paid in cash, but there are quite a few win-win scenarios we can imagine. For example, an employee may have student loans. You could take over their minimum payments and reduce their cash compensation by the same amount. Their life is no different, but you’ve saved some money on taxes.
Lower Payroll by Hiring Work Opportunity Tax Credit (WOTC) Eligible Employees
The WOTC is a tax credit for people from groups who face significant barriers to employment. Eligible categories include veterans, ex-felons, and even teenagers working summer jobs.
If you need to hire, it’s worth checking if someone on the approved WOTC list may fit your needs. Depending on circumstances, the credit is worth anywhere from $1200 to $9600 per employee.
Reduce Personal Income Taxes by Choosing to be Taxed as an S Corp
If you’re making between $50,000 and $100,000, this could save you a few thousand a year. If you’re making over $200,000, you could see five-figure savings with this method.
Unless you’re a shareholder in a major corporation, you’re probably being taxed as a pass-through entity, where profits (and losses) “pass through” to your personal income taxes. Tariffs are changing your COGS, but a little creative tax planning could help preserve the income you do get from the business.
The details get complicated. However, in short, the switch is a legal structure that enables business owners to save on FICA taxes while shifting profits from higher regular income tax brackets to lower qualified dividend rates.
Here’s how:
- LLC owners pay FICA tax (15.3%) and regular income tax (up to 37%) on all business income.
- S-Corp owners take some income as a salary (taxed normally), and the rest as a qualified dividend (0%, 15%, or 20%) or non-qualified dividend (taxed at regular income rates).
- By choosing to be taxed as an S-Corp, you’ve broken off a piece of your income, exempted it from FICA taxes, and potentially lowered the rest into a more favorable bracket.
For more information, read our LLC to S Corp tax guide, or ask an indinero expert if this is right for you.
Preserve Cash Flow by Deferring Income and Accelerating Expenses
When you recognize transactions can make a big difference in how much tax you pay. The key is the difference between cash vs accrual accounting: do you record things when cash exchanges hands, or when contracts and commitments have been made?
Here’s a simple example.
- Let’s say it’s December, you’ve ordered $50,000 worth of materials, but agree to pay in February. Under accrual accounting, you get to deduct that $50,000 from your taxes this year even though cash won’t leave your bank account until next year.
- Meanwhile, you’ve just finished a big $100,000 project, but hold off on invoicing until February.
In effect, your taxable income is lower (for now) because you’re recognizing expenses today and income tomorrow. You’ll eventually have to pay tax on that money, but for the moment, there’s more cash in your pocket.
FIFO vs LIFO Accounting
When valuing inventory, do you use the first-in, first-out (FIFO) method? Most manufacturers do. It matches how goods flow through their business, where they sell the oldest items first. Think supermarkets; the milk with the nearest expiration goes in the front.
But in a tariff environment, last-in-first-out (LIFO) may be advantageous.
Prices just went up, and LIFO allows businesses to deduct recent higher-cost purchases against current sales. The cost of goods today is higher under LIFO, creating a larger business deduction and lower taxable income.
Keep in mind that this method defers when the older inventory will be claimed. It’s good for preserving cash flow in the moment, but eventually, those taxes will come due.
Claim the R&D Tax Credit
Given how much it’s worth, it’s surprising how few businesses claim it.
Are you doing research and development in the US? Do you have a federal tax liability? And does your research pass the IRS tests? Then you may be entitled to up to $500,000 in tax credits for work you’re already doing.
Check if you’re eligible with our R&D Tax Credit Questionnaire.
Cover the Basics, and Go Deeper
Clients often ask for creative tax strategies or loopholes. We know a few. But the truth is, it’s easy to get caught up looking for something exotic before the simple things are covered. Automating expense tracking, setting up payroll correctly, and keeping good records don’t sound glamorous, but they can quietly save you tens of thousands of dollars.
When the time is right, reach out. Our qualified CPAs and fractional CFOs will help you uncover savings that fit your specific business. Don’t let rising costs eat into your margins more than they have to.
