December is known for its celebrations, reflections, and planning. If you’re a business owner, you’re likely setting revenue goals for next year, buying holiday gifts, and planning out any big purchases or investments.
As you close out your books for the calendar year, below are some valuable (non-retirement plan) end-of-year tax tips to keep in mind.
Review your reports with your accountant
What can you do to make sure your business ends the calendar year with a healthy financial status? If you’re a DMA monthly or quarterly business client, start by reviewing your most recent financial statements. If you have questions, concerns, or corrections, please contact our office to discuss with your tax advisor.
If you are a DMA business tax client but are not a monthly or quarterly business client, start by reviewing your profit/loss statements from your computer software or manual system. You can also complete your Tax Organizer which will remind you of previous year deductions. You will be receiving it in the mail in mid-December – contact us if you don’t receive it!
If you’re not a DMA client, consider consulting with a tax planning expert. These professionals have experience with businesses of all sizes, across multiple industries. After reviewing your expenses, billing, and costs, they will offer advice and strategy planning based on your unique situation.
No matter who you visit, make sure that you have your records accurate, complete, and as up to date as possible at the time of the meeting. It is difficult for a professional to provide good advice when the information provided is not up-to-date, complete, and accurate.
Defer or Accelerate Income
As a business owner, it may make sense to defer income from December to January. By deferring, you delay the receipt of income, such as delaying billing if you are an accrual taxpayer. This could yield a tax benefit because the income is recorded as taxable income for the next year. By lowering the amount of taxable income that your business made in the current year, you could avoid going up a tax bracket and paying a higher marginal tax rate.
Conversely, if your business sits comfortably in a 22% tax bracket but you expect (based on your growth) to be in the 24% tax bracket the following year, it may make sense to accelerate income. This may involve renewing sales contracts early, extending contracts or whatever billing strategy results in your business receiving the revenue before the end of the year.
If your business is on a cash basis of accounting, consider paying business expenses prior to year-end, as the payment will be treated as an expense in the current year. Expenses paid after year-end will be recorded in next year’s taxes. If you pay business expenses by a charge card, expenses charged to a bank credit card are deductible on the date of the charge, however, if you use a store credit card the expense is deductible when paid.
If your business has an accrual basis of tax accounting, consider purchasing needed supplies prior to year-end. You do not necessarily have to pay for the supplies prior to year-end, but you will have to record the amount owed as a payable on your books.
Consider purchasing needed equipment
If you are contemplating buying needed equipment or other long-lived assets, consider purchasing the item(s) prior to year-end. Current Federal Depreciation rules allow for accelerated depreciation for equipment and assets with specific useful lives purchased in 2019. However, you must take delivery of the assets prior to year-end and pay for them if you are a cash basis taxpayer. Take note that if you are considering purchasing a vehicle, special rules and limitations apply and that most real estate assets are not eligible for accelerated depreciation. It would be best to contact your tax adviser if you have any questions regarding the tax treatment of equipment and assets purchased prior to the year-end.
Overall, these strategies are meant to legally reduce the amount of taxes that you pay per year. Taking advantage of these strategies requires careful planning because mistakes can lead to costly fines from the IRS. Are you in need of a tax planning expert? Give us a call or send us a message today, and we’ll help you plan your personalized tax strategy.