2011 Year-End Tax Planning

It’s about that time,  folks.  2011 ends in 7 weeks and it’s time to plan how to handle your taxes.  We all have to pay something  (except if you’re a multimillionaire or billionaire, in which case you pay nearly nothing!),  so before December 31 it’s important to enact a strategy that will work well for you.

Tax planning boils down to either accelerating or deferring income or deductions.  In other words,  do you want to report and pay taxes on more money or less in 2011 and do you want more or fewer write-offs?  The road you follow will depend on many factors,  including what you did last year,  how much money you will make this year,  whether you expect to make rather more in 2012 because a big project will start then,  or you expect to make rather less next year because an important project will soon conclude and you have nothing big on the horizon.

Take a look at your 2010 tax forms and 3rd quarter 2011 P & L statement to see what your financials say about your options.  What do fixed and variable expenses look like?  That will impact your decisions about deductions.  What does net profit look like?  That will impact whether you choose to accelerate or defer income.

If you want to accelerate income,  start by collecting outstanding receivables.  Pick up the phone or send an email and ask clients to pay ASAP,  or at least before December 31.  Tell them it’s a tax-planning matter (it sounds so much more dignified than telling clients that you plain old need the money!).  If you’ve got a contract in the works,  ask for a bigger retainer.

If you opt to defer income,  perhaps because 2011 has been a good year and you’re not sure what 2012 will bring,  then wait until January to collect receivables and ask for a smaller retainer fee.  BTW,  it’s possible to defer up to 25% of your income through your Solo 401K and it’s tax-deductible.

If you need write-offs,  scout for year-end deals on office furniture,  computers,  iPads,  office supplies,  software and whatever else you need to do business,  including enrolling in a course or attending a conference.  Office furniture,  computers,  company vehicles and other big-ticket items can be written off in a lump sum,  or depreciated over a period of years  (which is in reality deferring the deduction since it’s being spread out).

If you elect for fewer write-offs,  hold off on shopping until the calendar turns.  Alternatively,  if you are presented with office or business equipment deals that you cannot refuse,  then choose the depreciation method and spread out your deductions.

Speaking of deductions,  remember your retirement plan.  Solo 401K and SEP-IRA are funded with pre-tax dollars and are tax-deductible up to $16, 500.00  If you’re 50+,  the catch-up contribution feature raises the maximum to $22,000.00.  Remember the tax-deductible income deferral feature if you’ve had a very good 2011,  but expect to have a less lucrative 2012.

Further,  you might want to make an appointment with your accountant or business attorney and confirm that you are enrolled in the best legal entity for you.  Your exit strategy can impact  the legal entity you use.   For example,  if you want to take on a partner and eventually sell out,  or pass the business to offspring,   niece or nephew,  a different legal entity may be preferable.

Finally,  the end of the year is the time to assess what’s happened this year for you,  professionally and personally. Review your successes and challenges.  What will you do differently in 2012 and what will you continue to do?  Did you meet your financial goal?  Did you manage to sign a dream client or get a wonderful proposal approved?  What should you reach for in 2012?

Thanks for reading,

Kim

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