YEAR END TAX
by: Cary Christian
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
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
* 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
* 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. You will have until the due date of
your return to set up most small business plans. In other words, if you
didn't set it up during 2002, it's not too late!
* 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 is real
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 explore
other options, please contact us. We would be happy to help.
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