You may have a great CPA, but if you wait to talk to him until your tax year is over, there's little he can do to lower your tax bill. To reduce your taxes, take these steps before the end of the year.
1. Pay All Outstanding Payables
If you use the cash-basis accounting method and have cash on hand, consider paying all outstanding accounts payable before the year ends even if they aren't due. This action allows you to record the expense in the current year, and in turn, it reduces your net income and tax bill.
2. Check Your Estimated Tax Payments
Review your estimated tax payments at least quarterly to ensure you're paying enough in taxes. If your payments are too low and you owe a large balance at the end of the year, you could wind up paying additional interest and fees.
You should also take this opportunity to review your state income tax payments, sales tax payments, employee withholding and other taxes to ensure that you're remitting the proper amounts and won't incur penalties.
3. Defer Income
You can also reduce your taxable income by deferring income until the following year. There are two ways to accomplish this deferment.
- For cash-basis accounting, you can delay sending out invoices and extend customer due dates until after the new year. Remember, the income is taxed based on when you actually receive it.
- For accrual-basis accounting or instances where you don't charge until after delivery, you can delay delivery of goods and services until the new tax year. Note that there are strict guidelines that apply to recording deferred income under accrual accounting; check with your controller services to see if you're allowed to make this move.
4. Review the Depreciation Rules
Have you purchased equipment or made building improvements during the year? Make sure to review the depreciation rules. To reduce your current year taxes, you should generally seek to maximize your expenses in the following order:
- Declare the entire expense in the current year.
- Use a shorter depreciation timeline.
- Use an accelerated depreciation method.
- Decrease the residual value to allow a greater annual depreciation expense.
IRS Publication 946 or your controller services can help you determine which of the above steps you're allowed to take.
5. Check for Tax Law Changes
In instances where you have the same types of revenues and expenses in the same locations, you may mistakenly believe doing your taxes is just a matter of changing the numbers. This misunderstanding could cause you to miss out on new credits, deductions or tax accounting methods that could lower your tax bill.
Even worse, you might miss a change that's not in your favor, underpay your taxes, or be subjected to an audit or penalties. Review IRS press releases regularly to ensure you don't miss changes that could impact your business.
6. Consider Moving Up Purchases
If you may need to purchase a new vehicle or other equipment in the near-term, explore making that purchase before the end of the year. This earlier date of purchase will allow you to declare higher expenses in the form of depreciation or the full purchase price.
More importantly, the list of business credits for things like electric vehicles, solar energy and energy-efficiency upgrades changes annually. If a credit is expiring, it could give you significant savings if you move up a purchase to take advantage of that credit.
7. Pay Employee Bonuses
Employee bonuses are also deductible, so a year-end bonus can help reduce your tax expense. One thing to remember when adding new expenses to reduce taxes (versus moving up expenses you already would have paid) is that your tax savings are only a percentage of the expense. From a financial standpoint, therefore, employee bonuses will likely cost you more than you would have paid in additional taxes if you didn't pay a bonus.
However, if you've had a good year, want to reward your employees and want to build goodwill, paying a bonus can be a good business decision. Doing it before the end of the tax year can reduce what you have to pay to the IRS.
Note: If you use cash-basis accounting, paying your employees early from a paycheck they wouldn't have received until the new tax year can also reduce your taxes, which is similar to paying other outstanding payables early.
8. Check Your Brackets
Sometimes, the best way to pay less in overall taxes is to pay more this year. This reduction happens when you shift up and down between brackets each year or when you're in a growth phase that raises your bracket each year. It can also happen when tax rates increase.
Have your controller services develop a forecast of future income and expenses to see if your bracket will change. If you expect to be in a higher bracket next year, consider doing the opposite of the above advice so that you can take advantage of a lower tax rate this year.
Note on When the Tax Year Ends
December 31 is the end of the calendar year and the end of the tax year for all individuals, but not all companies use the calendar year for their tax year. When timing your tax moves, be sure to check whether you use the calendar year or previously opted to use a fiscal year ending on a different month.