Whether you’re looking to save money, lower your tax bill, or simply have confidence you took smart year-end actions, there are many things you can do to help lower your tax bill.
But today I’m going to share my two simple last-minute tax tips! These two last-minute tips have nearly universal relevance to small business owners. And best yet? They’re easy to implement! So let’s get going…
*Side note: if you go through the tips and find yourself wanting more help tailoring tax strategy to your specific situation, check out the services I offer.*
#1) Defer your business’ income.
Assuming you’re filing on a cash-basis (most small business owners & self-employed file this way), defer your income.
How does this work? Simply don’t send out any more invoices. If you have invoices that would typically go out before the 31st, don’t send them. Similarly, if you’d typically follow-up on unpaid invoices, don’t follow up until January 1st.
This can help you reduce your business tax burden because when you’re filing on a cash basis, you only pay taxes on the amount of money you received. Essentially, if you haven’t received the money, you can’t pay taxes on it.
How effective is this particular last-minute tax tip? Extremely effective.
At minimum, you won’t owe your tax rate on the amount you would have received. For instance, say your tax rate is 22%, and you hold off on sending $3,000 in invoices. By NOT sending the $3,000 worth of invoices this calendar year, you’ll NOT report that $3,000 this year, and will NOT owe the $660 in taxes that would typically be due on the $3,000. Essentially, delaying that $3,000 in this scenario would save you $660.
Even more significantly, deferring business income might keep your tax rate from increasing when your income level is right on the cusp of changing tax rates. All tax rates are based on a certain threshold of income, and when you make more money, your tax rate increases at specific thresholds. So, how would this look in a theoretical example? Let’s break it down. First, let’s assume your income is right at the max limit of the 24% tax bracket in the year 2018. Please note that this example uses the 2018 tax rates–while exact tax rates and tax thresholds change every year, this example shows HOW deferring your income (when you’re on the cusp of a tax rate change) is relevant every year, though the financial difference will vary). As such, if you make $1,000 more in 2018, you’ll jump from the 24% bracket to the 32% bracket. You have $3,000 in invoices you are holding off in sending. By NOT sending the $3,000 worth of invoices this calendar year, you’ll NOT report that $3,000 this year, so you’ll maintain your 24% tax bracket, and you will NOT owe the extra $240 for the $1,000 in the 24% bracket NOR the $640 for the $2,000 in the 32% bracket you would have owed if you collected the income. Essentially, delaying that $3,000 in this scenario would save you $880.
#2) Increase Expenses.
Again, assuming you’re filing on a cash-basis, business purchases you make before January 1st are deductible on your tax return.
How does this work? Increase your expenses–spend more money before January 1st.
This can help you & your business tax-wise because you’ll subtract the amount you spent from the total amount of income you brought in. What’s left is what you get taxed on.
How effective is it? Depending on your situation, this can be extremely effective.
Keep in mind that increasing your expenses won’t give you one-for-one tax savings. Meaning, if you buy a $2,000 piece of equipment for your business, it won’t reduce your tax bill by $2,000. How much will it reduce your tax bill? That depends on several factors…
First, are you going to depreciate it? The general wisdom would be that you have to depreciate something like a computer (and most taxer filers will assume this unless you specify otherwise), however, there are special elections you can make that would allow you to deduct more this year (which would then reduce this year’s tax bill by more).
Second, we go back to the whole tax rate thing again… Say your extra $2,000 expense happens when you’re in the 35% tax rate. By spending the extra $2,000 now, you will avoid paying the $700 in taxes you’d owe if you hadn’t made extra purchases.
What about other types of business expenses? This is where you can find some really effective tax savings, because things like retirement contributions and gifts to charities can be deducted at closer to the one-to-one one rate. Make sure you get professional help from someone who takes your WHOLE tax situation into account (business & personal) when you consider these options, because it’s actually possible to make retirement contributions and give to charity and still NOT get to deduct anything. It all depends on thresholds and how much you contributed & gave as well as if you’re personal taking standard deductions, itemize, etc.
If you need help getting clarity or mapping out your tax & financial situation, this is exactly what I love to do!
Over to you–
What to do you think about these two simple tax tips? And what’s your favorite end-of-the-year financial move?
