There are end of year business planning tasks the small business owner can do that can cut the amount they will owe in business income taxes. The 5 strategies in this resource are ways in which many small business owners have managed to modify their end of year business practices or structure to cut their tax bill.
Strategy #1: Accelerate Expenses and Delay Income
If the business has been doing well and anticipates a significant taxation burden from operational profits, this strategy can reduce that burden. Prepayment of expenses that would normally come in the next tax year moves them to the current year’s expense side to reduce profit for taxes.
Travel that is planned for the next year can present an opportunity to prepay registration fees or other costs associated with a business event or conference. Any valid business expense that would have been paid in the next year that can be moved into the current year will reduce taxes.
Just as effective is delaying or deferring income. Depending on whether the business is on a cash or accrual basis for accounting, invoicing for products or services or receiving payment can be deferred until the next tax year to reduce taxable profits.
On the other side of this strategy would be a year in which there is not a large tax liability, and there are expectations of next year’s profits being better. In this case, the small business owner’s end of year business planning would just flip the strategy and accelerate income into the current tax year and defer expenses into the next year.
Strategy #2: Do a Business Type Check
A discussion with a tax professional or the business CPA (Certified Public Accountant) could examine the structure of the business. End of year business planning can yield an opportunity to change the tax structure of the business, perhaps moving from a sole proprietorship to the S-Corporation or LLC (Limited Liability Company) structure. This is not something to be treated lightly, thus discussion with a tax professional is advised.
Strategy #3: Make Large Purchases for Accelerated Depreciation
The Tax Cuts and Jobs Act continued some generous deductions. Some depreciable equipment purchases can be expensed 100% in the current year rather than depreciated. There is usually a nice boost in vehicle sales due to end of year business planning for tax savings. Often a new car or truck can be totally expensed in the current year. This can also apply to new computers or other office or production equipment.
Strategy #4: Retirement Plan(s)
Setting up a new IRS qualified retirement plan can be an excellent end of year business planning move to save on taxes. If the business already has a plan, and if there are still allowable deposit amounts, they should be used for tax savings. Maximizing qualified retirement plan contributions not only saves on current taxes but also helps in building a comfortable retirement.
Strategy #5: Contribute to Charity or Deductible Local Organizations
Local businesses often consider accelerating charitable or marketing deductions as an end of year business planning strategy. Maybe new uniforms for a local team or some other goodwill deductible contribution is a good idea from both a tax savings and local advertising strategy.
These 5 simple end of year business planning strategies have helped small business owners to reduce the tax bite on their businesses and on pass-through income to their personal returns.
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