Thursday, December 19, 2013

Simple and Smart Year End Decisions to Reduce Your Taxes

This is the time of year I start getting questions like “Is there anything I can do to reduce my tax bill?” My answer is an emphatic “Yes!” Especially if you are a business owner. Even wage earners have a number of opportunities.

When I was planning this blog I decided to find a couple of really good sources to link to. After all, I’m not a tax accountant so surely there are some tax accountants out there with excellent lists. There are. And if you want some nighttime sleepy reading, just google “year end tax planning for businesses.” I couldn’t find one single source that I felt was simple and to the point. They were all ridiculously lengthy, highly technical and focused on mostly obscure expiring tax credits. Need I say more?

For your personal finances, I did find an excellent straightforward list at Kiplinger. Basically, maximize your retirement and other tax savings accounts, finalize your charitable contributions and buy health insurance on the exchanges prior to December 23rd.

And for the business owners out there, I made my own simple straightforward list. I think the most important thing to think about is that for every $1,000 you spend before December 31st, your final tax bill will be about $333 less. Conversely, for every $1,000 you don’t collect from your clients, your final tax bill will be about $333 less.

Now, there are all kinds of caveats on those statements. They only apply if you’re a cash-basis reporting business; it doesn’t actually save you money, it just defers it until 2015; and you have to balance your desire to hit 2013 goals with your desire to save money. Most importantly, you can only do this kind of tax planning if you have excess cash in your business. If your business is “living invoice to invoice,” you likely don’t have any cash sitting around with which to plan. But if you do, here are some simple recommendations:

  1. If you have any need for equipment or furniture in the next 3-6 months, buy it now. Section 179 deductions will allow you to write off the total cost of most purchases.
  2. Paying your estimated state income taxes before December 31st will allow you to deduct them on your 2013 federal return if you itemize your deductions.
  3. Pay every accounts payable you have due over the next month. If you really want to make an impact, reach out to a few vendors that you think might appreciate the cash flow and ask if you can prepay in exchange for a discount. You’ll save on your bill, and you’ll defer your taxes.
  4. Take your foot off the gas on any collection activities. It’s counterintuitive to good business practice, but now is no time to be hitting your accounts receivable hard. Every dollar you put in the bank over the next couple of weeks you will have to pay taxes on by April 15th. If those same dollars aren’t deposited until early January, you won’t have to pay tax on them until April 15, 2015. That sounds a little better, doesn’t it?
  5. Maximize your retirement contributions if you haven’t already. Just do it.
And, speaking of April 15th, there’s no time like the present than to do a rough calculation of what your tax bill is going to be. Those of you with rock star accountants already know the general range that will be due. For everyone else, pick up the phone and ask your tax accountant to estimate it for you. Or, roll up your sleeves, get your calculator out and use your algebra skills. [2012 Tax Bill/2012 Net Profit = x/2013 Net Profit] Solve for x.

Tax planning, short, smart and simple style.

[Big huge disclaimer: Everyone’s tax situation is different. To make the best tax planning decisions, talk to your tax accountant and CFO. Tax planning from a blog is just that; tax planning from a blog. But I hope I gave you some food for financial thought.}

-Stacey Powell

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