For a cash basis taxpayer, it is very easy to manipulate income and deductions for year-end items. For example, if you want to keep revenue down, you would wait until the beginning of the next year to send out invoices. You would not need to record the revenue until the payment is received in the next year. You can also maximize deductions by paying your outstanding bills, or making large purchases that you were going to wait and make in the next year. The only thing to be aware of for this strategy is that if you prepay expenses that benefit more than one year, you can still only deduct the portion of the expense related to the current year. The remaining amount would be expensed in the periods it relates to.
Things are a little more complicated for an accrual basis taxpayer, but strategies are still available. One possibility is to have the board of directors authorize a charitable contribution. As long as it has been documented in the board’s minutes, and is paid within two and a half months after the end of the year, it can be deducted in the current year. Another strategy similar to this would be to accrue bonuses to employees in the current year, as long as they are paid within the first two and a half months of the next year.
For a self-employed taxpayer with an IRA, SEP, SIMPLE, or other qualified plan, the plan should be reviewed each year. The purpose of reviewing the plan is to make sure the plan maximizes your benefits, and is at a reasonable cost to you. A corporation with a retirement plan should review their plan as well. There may be opportunities for cost-cutting measures.
Another important tax planning tip is to maximize write-offs for purchases of business equipment. Rather than depreciating the cost of equipment over its useful life, you can take the first-year expensing election, which can be a huge benefit. If the business has property with no value to the business, they may want to abandon the property instead of selling it. The reason for this is that the business can take an ordinary loss deduction instead of a capital loss on a sale. There are many other tax planning ideas. Consult a tax planning professional for advice on your situation.
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