Businesses Should Plan Ahead for Year-End Tax Strategies

The tax code allows business owners to reduce their tax bills up to year-end. But, the tax rules can be complicated, and there are timing issues with some tax strategies that require more planning. By waiting until year-end to consider tax reduction strategies, you risk missing out on significant tax savings that can be put to work in your business. There are two year-end tax strategies that, with proper planning, can positively impact your cash flow this year and next.

• Defer income and accelerate expenses
• Purchase new equipment

Defer Income and Accelerate Expenses

This time-honored tax strategy allows you to micromanage your year-end taxable business income to minimize taxes this year and next. The following examples assume you use the cash method of reporting. The strategy can work with the accrual method, but you may want to consult your tax advisor because the rules differ.

For income deferral, you need to look at your current year's income relative to your projected income for the following year. If you expect your income next year to be lower than your current year's income, it makes sense to defer income into the following year. Generally, you only have to report income in the year you receive the cash in hand. To accomplish this, you wait until the year's final week to issue some invoices so they will be paid in the next tax year.

For accelerating expenses, you move some expenses you would typically pay in January into this year. The rule says you can deduct expenses in the year you mail the check. You can pay recurring expenses due in January early using your credit card. Again, this strategy is best used if you anticipate lower business income next year.

To maximize this strategy's tax benefits, thoroughly assessing your income picture for this year and next is essential. While reducing your tax liability this year may seem like a good idea, you want to avoid creating a more significant tax liability next year.

Purchase New Equipment

This strategy has been significantly enhanced under the new tax law. With Section 179 expensing, you can now expense the entire cost of most new equipment up to $1 million of property placed in service by December 31, 2023. The deduction is phased out dollar-for-dollar for purchases that exceed $2.5 million, phasing out entirely for purchases over $3.5 million. The new law now includes the expensing of certain improvements to the interior of your business property. Adding a new roof or HVAC, fire protection, alarm, or security systems also qualified for the deduction.¹

The rules for Section 179 expensing can be complicated, but well worth the effort if you have plans to purchase business equipment sometime in the future. So, discussing your options with your tax advisor would be essential.

The Time for Year-End Tax Planning is Now

With these strategies, you have the opportunity to control your tax liability right up to the last day of the year. But the time for planning these strategies is now. By the last quarter of the year, you should have a clear picture of where you will be with your business income. You should also be better positioned to project your income for next year. A meeting with your tax advisor now could be worth significant tax savings you might otherwise forego without planning.

1: IRS.gov. IRS issues guidance on section 179 expenses. December 21, 2018 https://www.irs.gov/newsroom/irs-issues-guidance-on-section-179-expenses-and-section-168g-depreciation-under-tax-cuts-and-jobs-act

 

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