Outside of selling in-demand goods and services, the next best way your business can produce income is through worthy investments. There are certainly no shortage of investments you can leverage to increase your profits; accordingly, all investments have advantages and disadvantages, and all of them impact your taxes in some way or other.
As awful as a bad investment is, a bad investment is made worse when it’s incorrectly managed in regards to your tax situation. You could end up overpaying, or being subjected to government fees and penalties. The same goes for good investment, which if not reported correctly, could end up costing you. For these reasons, it’s best to be as informed on business tax law as possible.
Check out ADP compliance insights for answers to some common questions and issues, such as how to identify negotiable or discretionary incentives. The federal government encourages businesses to take advantage of tax and business incentives, but more than half don’t. By taking advantage of these incentives, you could potentially offset other costs and come out ahead in the New Year.
Types of Business Investments
There are many different investment strategies your business can utilize. In general, these investment can be broken into three basic categories: ownership, lending, and cash equivalent. Ownership investments are typically the most profitable, but also the most volatile. Stocks, real estate, valuable collections, and money invested in the business by the business owner all fall under this category, which is risky because values could permanently drop and cost you the investment.
Lending investments are less risky, but with less risk there is less profit. Savings accounts and bonds are examples of lending investments. Your investment will likely gain a profit in a preset amount of time. And, sometimes, you can get your initial investment returned to you should something go wrong.
Cash equivalents carry the same risk and reward as lending investments, but they’re more liquid. Their ability to be turned into cash quickly is an advantage for some. It’s always best to consider more than one type of investment to maximize potential profits while mitigating risk.
Investment Loss and How it Impacts Taxes
If investments aren’t effectively differentiated and managed, or you’ve simply had some bad luck, the risks are severe. You could lose the entire investment, and experience capital losses. Capital losses are when you sell the ownership of an investment at a loss.
Capital losses can reduce your tax liabilities (up to a specific limit) because they’re deducted from your taxable income. Less taxable income for the company means that your tax obligations are lowered.
Investment Profit and How it Impacts Taxes
Investments that are effectively managed (with luck on your side) can result in huge profits. Those benefits and capital gains come with more tax implications than losses. If the ownership of your investment is sold for profits or if lending or cash equivalent investments gain interest, you will be asked to pay taxes on this income.
These added tax obligations are called capital gains taxes. Basically, whatever profit there is from investing is considered taxable income. This income is taxed at a specific rate based on whether the gains are from a short or long-term investment. Given that tax rates are variable, the length of the investment should be considered before it’s sold for capital gain.
Taxes and Investments
Obviously, any investment should be carefully managed both in the short and long term. Businesses and individuals should always consider multiple investment strategies as a way to mitigate risks. Before any investment is sold – whether at a loss or profit – it’s extremely important to consider tax ramifications.
You need to be certain you’re making the most profitable decisions possible at all times. Taxes can greatly affect profits. For this reason, it’s important to be as informed on the topic as possible and seek professional guidance whenever necessary.