It is that time of year again where some business owners are scrambling to understand how they can lower their tax bill before heading into the Holidays. Luckily, before the end of every year you may have the opportunity to receive or defer income or expense from this year to next (assuming you are a cash basis tax payer) depending on how your business results are shaping up. This can enhance or lower your overall tax liability. Let's take a look at 8 quick tips that come to mind.
1 - Timing of your Income and Expense
You may have the option of taking income this year or delaying it until next year. If you have a lower profit this year and expect a higher profit next year, then by taking additional income this year you will pay less tax.
For example: This year it looks like you will have a loss or close to a loss and next year you know you should have a large profit. You could encourage customers to pay you before year-end or pay in advance to bring in additional income this year. Assuming you have a loss this year, then if the new income puts you in a profit position, that is okay, because you will pay less tax on the small profit versus more tax on the much larger profit you expect next year. Same is true in reverse. If you foresee a decline in your business or industry in the coming year, you could get customers to extend payment or you could bill them later than normal to prolong their payment to your business as a way to move that income to the next year.
As you have figured out, expense timing works like income timing. Take expense deductions in years where you have higher profits in order to lower those profits and in effect lower your tax liability. If you know the business tax rate is going to increase in the coming year, perhaps you want to wait on certain expenditures until the coming year in order to lower profits under the new higher business tax rate.
2 - 401(k) plans
If you have a profitable business and are looking for ways to further cut your tax bill, a 401(k) plan could be an alternative. Even if you are a sole prop you can still setup a 401(k) plan to set aside dollars for retirement as well as save on taxes.
Some Tax benefits of the plan:
You can claim a business tax credit for the costs of setting up the plan with limitations.
The dollar amounts set aside for yourself and your employees are deductible as a business expense (up to specified limits)
The individual employees receive this money tax deferred
3 - Write-off Bad Debts
Bad debts or those people that owe you money that you know deep down you will never ever collect. You can “write” those off before year-end and take as a business deduction to reduce profits and tax liability.
4 - Obsolete Inventory and Equipment
You can “write-off” or “write-down” obsolete, damage, or worthless, equipment. This can be taken off your records to increase your expense and therefore reduce your taxes. Basically, take a list of all inventory and/or equipment and go down the list marking everything that is worthless, damaged beyond repair, or slightly damaged and add up the values.
5 - Bonuses or Gifts
If your business is profitable it probably has something to do with your employees. So perhaps you want to surprise them with a Holiday bonus or stocking stuffer. These are expenses that are deductible to lower your tax burden and certainly boost employee moral!
6 - Depreciation
Depreciation sounds pretty boring, right? Well most of the time it is. Depreciation is basically the reduction in value of an asset over time, this is generally an accounting or tax entry. There are a couple ways, one of which is Section 179 deduction, in which you can accelerate depreciation in the year in which the asset was purchased. This means, you can take more depreciation in the 1st year and as such pay less in tax, this was put in place to spur investments.
7 - Green Cars and Property
You can receive a direct tax credit and perhaps state tax savings for purchasing alternative motor or hybrid vehicles. You can also receive deductions from energy efficient property (land, buildings, etc.). Think of solar powered factories, homes, and so forth.
8 - Charity
Last but certainly not least, is contributing to a charitable foundation or cause. It is the Holiday season after all. Surely you can find a good cause whether it is a local, regional, State, National or even International Charity to support. In turn, this is an expense that can lower your tax burden.