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Year End Tax Planning

by: SBC Staff

Your 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 should consider:

  • 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 limitations.

Now 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 permanent.

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.


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