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Ask The Experts: Tax Planning
Read this article in PDF form here.
Q: Before I started my small business I worked for a construction company. The owner and the bookkeeper always spent the last few days of each year with “tax planning.” I am not sure what they were doing. Should I be considering some year-end planning for my business?
A: The easy answer is yes, you should certainly sit down at the end of each year and review your overall financial and tax situation. Most tax planning ideas lose their effectiveness as soon as the New Year’s Eve Party hits midnight. In other words, very few tax planning ideas are retroactive, but with a little planning you may be able to reduce the check that you otherwise would be required to write on April 15, 2014.
The most direct path to tax savings includes either reducing revenue or increasing expenses, neither of which sounds very appealing at first blush. However, managing the timing of each of these categories can be helpful. For example, if you are completing a job or providing consulting services to a client at or near the end of the year, consider sending your bill after January 1 rather than before the end of the year.
As a cash basis taxpayer, the payment you receive in January will not be taxable income until your file your tax return next year. This is simply a timing adjustment which provides you the benefit of the time value of money by delaying the tax due until you make your first quarterly estimated tax payment.
Likewise, if you are planning to purchase some additional equipment or supplies during the first quarter of next year, consider accelerating those purchases into this year. The cash expenditure will be deductible in the current year, and most likely even equipment purchases will be fully deductible based on accelerated depreciation options.
Don’t forget, never ever buy something or spend any money just to get a deduction. However, if you are going to spend that money anyway, consider spending it before the end of the year rather than just after.
Make sure you have captured all expenses that will be deductible in your specific business. Don’t forget about those expenses that might not show up in your business checkbook such as the business use of your personal vehicle or the use of a home office.
Also make sure you consider the benefits of investing in your own future by making a deductible retirement plan contribution. Build a new habit of spending some time at the end of each year reviewing your overall financial situation. Don’t wait until April 15 to think about taxes, because by then, it may be too late to make a real difference.
Keith Hall, NASE Tax Expert