As the year continues to wind down, it is never a bad time to think about small business taxes. Here is a quick look at some tax tips for small business that can pay big dividends for the year.
1) Update Your Accounting - It’s important as part of your year-end tax strategy to have a good understanding of your company’s financial situation. Spend extra time ensuring your books and records are up-to-date and accurate. It would not hurt to plan time with your accountant for year-end advice, particularly to your operations.
2) Defer Income - Any payments your company can receive during the first week of January, as opposed to December cuts your tax bill. Every cent deferred until January will not owe taxes until April of the following year. Any deferral strategy will depend on your profit and losses for the year and business legal structure (LLC, partnership, corporation, etc.)
Depending on your income tax rates in the foreseeable new year, deferral of income can make the best sense for many sole proprietors, partnerships, LLC's and S corporation. Ensure that your cash flow can handle the deferred income.
Don’t forget to push any charitable donations for next year to the current year. Make sure you get a receipt for the tax deduction.
3) Increase Expenses – Purchase items your business will require in the immediate future to maximize deductions for this year. If you see a need for goods and services in the first quarter of the new year, buy them now, if cash flow permits. Consider the following items for expenses:
Office supplies: Stock up on fax paper, printer cartridges, stationery and other office items.
Pay bills early: Pay your bills before the new year in such areas as: cell services, subscriptions, rent, insurance and utilities.
Equipment purchases: if you will be buying new office equipment, consider purchasing now. You’ll have to decide whether an immediate write off is best or spread the depreciation over a period of years. Consult with your accountant to examine your circumstances and company structure to maximize your deductions. In addition, your equipment will have to be in your office, “in use” by year-end.
Other Items: This category includes: pre-payment of subscriptions, business travel bookings, equipment repairs, and maintenance.
4) Inventory Write Offs - Depending on your accounting methods, you may wish to check inventory for goods that have been damaged or have become obsolete. The drop in market of the inventory can provide your company with added deductions.
5) Contribute to a Retirement Plan - Make payments to your retirement plan or set one up before the year-end to reduce your income for this year. Check the contribution limits for your type of plan.
These year-end tips will apply differently to each business owner’s situation and accounting method. The cash method of accounting allows for deductions and income for the year they are paid or received. The accrual method of accounting applies income and deductions in the year earned and incurred. Take the time to review the best strategy with your accountant and make the most of the year-end tax planning for your small business.