OK folks, it’s time to think about what to do before December 31, so that you can reduce your tax burden. If you retain an accountant or a business and tax attorney, make an appointment to discuss year-end tax planning. You will have a few of the following issues in mind:
Full deduction vs. Depreciation
Depending on how much money you’re on track to make this year and your ability to reasonably project earnings for next year, you will either make purchases before December 31, or wait until after January 1. Further, you will either take the full up-front deduction on business equipment, or depreciate business-related purchases and spread the deductions out over several years, to soften the tax bite on future earnings.
If you did well financially this year, you’ll probably take the full deduction on business equipment such as your new computer, printer, scanner and/or smart phone this year, to add more expenses to charge off against gross earnings. But if subsequent years appear more financially rosy, then use the depreciation method and spread those deductions forward.
Remember all selling expenses
With the passage of time, it is easy to allow a few expenses associated with generating revenue to get lost in the shuffle. Did you attend a professional development conference this year, or take a course? Did you buy business books? Pay to attend networking meetings? Pay dues to join the chamber of commerce or Rotary club?
You may deduct these expenses. Proper labeling and immediate filing of receipts and posting of expenses into QuickBooks, Excel or even an old-school ledger ensures that you will take all legal deductions in the quarter where they should be documented. Make it easy for yourself to take advantage of every allowable deduction. If you have not been on top of this stuff, start looking for receipts now, before you get tied up with Chanukkah and Christmas, and record the transactions, so you’ll be all set for the January 15 quarterly tax filing.
Retirement plan contribution
Especially if you had a good year, make the maximum retirement fund contribution. If you are 50+ years old, or will celebrate your fiftieth birthday on or before December 31, you are eligible to make the catch-up contribution of $5, 500.00 maximum. If revenues generated were not stellar, try to make the largest retirement fund contribution you can manage (if you can manage).
It’s not always possible to set money aside for retirement, unfortunately. Making money is often difficult, slow paying clients ruin cash flow and living expenses are rising. It’s been reported that 40% of the self-employed have no retirement funds available. Many drew down to stay afloat while re-engineering professionally, following a lay-off. Others used retirement money to launch their business enterprise. As a result, the retirement fund deduction is much underutilized, according to the IRS.
Home office expenses
If your fancy smart phone or land line with bells and whistles are dedicated to business, then you may fully deduct their purchase and monthly billing charges. Ditto for your office supplies, internet connection and other office expenses. You may also deduct a portion of your heating and electricity expenses (based on the square footage of your office space as a percentage of your living space).
The fail-safe way to keep track of business expenses is to open up a separate business checking account and maintain a business-only credit card and thus separate your business and personal spending. Automatically, there will be a record of all business expenses. Most business credit cards will provide a year-end summary of charges, to help you along (AmEx does this regardless).
Before the year ends, get your arms around your business expenses, allowable deductions and the impact on your tax burden. As millionaires know, it’s not just what you make, but also what you keep.
Thanks for reading,