Year-End Small Business Tax Strategies

by | Sales and marketing

It’s no secret that financial decisions you make in, say, February and March can seriously impact your tax liability for the entire year. So ideally, you and your company should be constantly engaged in intelligent tax planning.

But even if that’s not the case, there’s still time to impact your tax situation prior to December 31.

As always, you should consult with your tax adviser or accountant on any matter relating to your taxes. Here are a few small business tax strategies to consider during that conversation.

First, Project Your Probable Tax Liability

Have your “numbers person” compile a year-to-date statement of your company’s profit and loss status. You can keep track of income and expenses during the year with an off-the-shelf software program.

The purpose of this exercise is to analyze what you’re dealing with in the way of tax obligations.

First, export the data to Excel, or another spreadsheet program where you can work with the tax liability numbers. This allows you to make reasonable estimates of revenue and expenses through the end of the year. You can do this by comparing the numbers to last year’s financial statements, and by taking into account booked and probable revenue and expenses for the remainder of the year.

After coming up with your forecast, you then need to decide if it’s worth making tax-favored transactions prior to December 31 in order to decrease your tax exposure.

The operative phrase here is, “if it’s worth…” Make sure you’re smart about this, which means…

Never Spend Money Just for Tax Planning’s Sake

Make sure any expenditure you shoehorn in to the end of the year is a purchase or investment you would have made anyway.

Deductions are great, in that they help offset the financial impact of a business purchase, but remember that it’s not a dollar-for-dollar trade off. The actual taxes saved depend on your tax bracket, how your business is set up, where your business operates, and a number of other factors.

Tip: Tax credits, on the other hand, do represent a dollar saved for a dollar spent. They’re tougher to find than they used to be, but still sometimes worth pursuing for some situations. Ask your accountant for information.

R.I.P.: Section 179 Depreciation

Ah, Section 179, we hardly knew ye. One of the best breaks for small businesses to come along in a long while expires at the end of this year.

In case you didn’t know, Section 179 of the IRS code allows your company to deduct the full purchase price (up to $500,000) of qualifying equipment purchased during the year.

But, be sure to move quickly, if this can help your company. After December 31, normal depreciation schedules return.To benefit from the Section 179 deduction, the purchase or lease must have occurred sometime between January 1, 2013 and December 31, 2013.

Be Careful about Rushing Expenses before the End of the Year

This is different from incurring an expense solely for the tax benefits, as was mentioned earlier.

If your company is having a bad year, with lower than expected earnings, you might want to sit tight. This is especially true if you expect business to pick up in 2014, or if other factors could place you in a higher tax bracket.

Is it Time to be Charitable?

Charitable contributions via checks mailed (but not necessarily delivered) by December 31, or credit cards charged by the same date, count as tax deductions for 2013. Just make sure you obtain receipts and/or written confirmation of the donation.

Tip: The IRS allows what’s called an enhanced deduction for certain kinds of charitable gifts. Check with your tax adviser – and perhaps with your favorite charity – for more information.

It Might be Time to Party!

Believe it or not, if you throw a holiday party for your employees, much of the cost can be deducted. The same is true for get-togethers thrown for customers, business partners and vendors.

Of course, there are certain parameters you need to respect. Check IRS Form 463 for specifics.

Image courtesy the Hewlett Packard Museum of Calculators.

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