Year End Tax Planning
by: SBC Staff
tax deadline is approaching rapidly. You're concerned because you believe you
may owe tax but you're not sure just how big the bill might be. You're thinking
about filing an extension just to put it off for awhile, but you know it will
continue to bother you until you know just how much you owe.
Does this sound familiar? Most small businesses do not pay enough attention to
their tax situation until it is too late to do anything about it. March 15,
April 15 and any of the extended deadlines are simply too late. You must think
about your tax position before the year ends. Where should you start?
Begin by actually determining what your tax return would look like if you filed
it on December 15. Go through the process of preparing your return or get your
accountant to prepare an estimate for you. If you're comfortable with the flow
of a tax return and any specialized calculations that apply to your business,
you can do this on a spreadsheet rather than on the forms. If you're not that
comfortable or proficient with taxation, actually fill out the forms to see
where you stand.
This is a very tough first step for many of you, we know. But it is absolutely
critical that you do it! You cannot plan and manage your tax liabilities unless
you know what they are before year end. You do not want to implement tax saving
strategies if you don't need to. You'll be wasting money instead of saving it.
Once you've determined where you stand you are ready to consider specific
techniques for either deferring or accelerating income or deductions.
Let's say you've determined you're going to be taxed at the highest rates on
your business income. It's been a good year! So you need to think about
deferring income and accelerating deductions. Here are a few techniques you
If you use inventory in your business, take
stock of what you have. If you have items that are damaged or are otherwise
unsaleable at normal prices, offer them for sale at a reduced price. If you do
so, you be able to write down the value to the reduced price whether you sell
them or not.
If you are a cash basis taxpayer, consider
paying expenses in December that are otherwise due in January. Write out the
checks and mail them at the end of December. If you need the cash flow, pay
them using a credit card where possible. You'll still get the deduction in the
current year but won't have to pay the credit card until January.
If you are an accrual basis taxpayer, make sure
you evaluate all your expenses that are coming due in January and accrue
amounts that relate to December. For example, if you pay a cleaning service
monthly on the 15th for cleaning your offices, you should accrue 16 days of
cleaning expense in December out of the amount to be paid on January 15. Go
through all of your expenses to look for this type of accrual capability.
If you are a cash basis taxpayer and have a
payroll due early in January, consider paying it early to have it fall in
December. Your employees will like it and you'll get the deduction this year.
If you are an accrual basis taxpayer, make sure you accrue the payroll related
to days worked in December.
If you are a cash basis taxpayer and have sold
goods on terms, get your customers to pay you just after the beginning of the
year. If you are an accrual basis taxpayer and have orders to process, check
with your customers to see if it would be acceptable to ship them on January 2
and move the accrual of the sale to the next year.
If you don't have a retirement plan, investigate
starting one right away. Check with your investment advisor or CPA to see how
much you could contribute in the current year. Be aware that if you have
employees, they will have to participate in the plan as well in order for your
contributions to be deductible. This can become quite complex but is possibly
one of the best tax planning options available to you, not to mention a very
sound investment vehicle.
If you are planning to buy equipment in the near
term, consider buying it in December and taking advantage of the Section 179
deduction that allows you to expense the acquisition within certain
let's assume that you find you will be taxed at the lowest tax rate or that you
have a loss and will pay no tax at all. Don't assume you are done! If you are
expecting a large taxable income next year, you will want to consider
accelerating income and deferring deductions. In other words, you will want to
do the opposite of the recommendations above.
Why would you want to create taxable income in a year when you will not owe tax?
To take advantage of the lower tax rates. If you can shift income from next year
that will be subject to a tax rate of 40 percent or more to this year where it
will be taxed at 15 percent, the savings of 25 percent or more is real and
Be sure you evaluate your tax position over the next week or so and take action
where necessary. Proper planning can save you a great deal of money.
If you need help with any of the above techniques or would like an independent
review of your tax situation, please contact us. We would be happy to help.