As a small business owner, you wear many hats. As the tax year draws to a close, it's time to take out your accountant hat and take a look at your year-end tax picture. If that picture looks bleak, take a deep breath and rest assured that you still have time to reduce your tax liability. Here are several year-end tax tips for small businesses.
Defer Your Income
Every business owner wants their venture to thrive, but an unusually good year can drive up your tax bill in a hurry. To avoid adding even more taxable business income, consider delaying your billing at the end of the year. If you worked on several large and lucrative projects in November or December, wait until January to invoice the work. This will flip some of your income into next year.
Accelerate Your Expenses
While reducing your income can reduce your taxes, so can accelerating your expenses. Have a recurring bill that you pay every month? Charge January's bill on your credit card in December. You won't actually pay the credit card bill until January but you can count the expense in December since that's when you incurred it.
You can do the same with payroll taxes. If you deposit your payroll taxes by December 31, you can count them as an expense this year rather than next year. You can also buy supplies and other items before you need them to increase your expense.
If you use the cash method of accounting, you can usually prepay for items up to 12 months in advance. This method has a few important caveats, however, so check with your accountant or tax professional before using this particular tax reduction strategy.
If your business needs some new equipment, buy it now instead of waiting. Section 179 allows you to skip the depreciation process and deduct equipment expenses in the year you bought the equipment. As such, large equipment purchases increase your expenses and reduce your taxable income. The IRS allows small businesses a deduction of up to $1.04 million for equipment purchases, which can really lower your tax bill.
Contribute to a Retirement Plan
Contributing to a retirement plan at the end of the year benefits you in two ways. First, it means you've tucked away some more money for your retirement, which is always a good idea. Second, retirement contributions are tax-deductible, helping to reduce your tax liability.
Qualified retirement plans let you deduct your current contributions from your taxable income. This lets you avoid paying taxes on the money now. Instead, you'll pay tax when you pull the money at retirement, at which time you'll likely be in a much lower tax bracket. IRS Publication 560 will tell you everything you need to know about retirement plans and related tax issues.
Make Charitable Donations
There are exceptions to every tax rule, but the IRS generally allows businesses to deduct charitable contributions at their fair market value. Not only can this reduce your year-end tax bill, it's also a great opportunity to get some good press. Like a retirement plan, charitable giving can help your business in more ways than one.
Take caution, however, if you are a sole proprietorship or another pass-through entity. If your business income passes through the business to you and you pay the tax, your charitable contributions will prove much more limited.
Give Raises Right
Rewarding hard-working employees is the right thing to do, but it can hurt you tax-wise. The more you pay your employees, the more payroll taxes you'll need to pay. To keep your employees and your checkbook both happy, consider giving raises in a form other than salary.
If, for example, you want to give an employee a $200 a month raise, take the $200 and contribute it to that employee's health insurance premiums instead. This way your expenses go up, which helps reduce your tax bill. But they go up only the $200 -- not the $200 plus your matching payroll tax contributions. This strategy reduces your income tax liability while still increasing your expenses to reduce your taxable income.
Old Inventory and Debts
If you're sitting on old inventory that no longer has value, this is the year to write it off. You can deduct what you paid for the inventory that's no longer salable. The same is true of old debts. If you have debts that you just can't collect, you can write them off as a deduction as well. Keep accurate records, however. You need paperwork to prove both of these deductions if asked.
Get Every Deduction
Remember at tax time that you can deduct advertising expenses, business-related educational expenses, business use of your personal vehicle, and more. You can even deduct half the cost of feeding your employees if, for instance, you buy the office pizza when working late. Bank fees and business insurance premiums may also be deductible, as are professional fees.
It's helpful to create a list of deductions to look for so you don't miss any.
As the year goes on you can spend a little time taming your to-do list. This way you won't find yourself scrambling at the end of the tax year. Instead, you can plan for deductions all year long.
Perhaps the best of the year-end tax tips for small businesses is this: Don't wait until the end of the year. Keep an eye on the numbers and understand how different activities change your tax picture all year long. Your accountant can help you plan ahead, but you can also benefit from automating your accounting processes with the right software.
A good tax plan not only saves you money but frees you up to focus on other aspects of your business. From website creation to lead generation and social media management, sales at eMarketing Associates stands ready to assist your small business. call us today and we'll help you grow your business in ways that enrich you rather than the IRS.