December is the time for holiday planning, but it should also be the time for tax planning. Opportunities to save money on your income tax bill are fewer once the year has ended.
Here are some important things to review when engaging in year-end tax planning:
Accelerate expenses and delay income
Increasing spending and delaying income can help reduce taxable income for the year. However, it’s essential to be strategic here. Start by reviewing expenses.
- Which expenses can be accelerated?
- Are you planning on investing in new equipment or spending money early in the next year? If so, can these expenses be accelerated to the end of this year?
Increasing spending may tie up cash, but it can also help cash basis taxpayers save money on their taxes for the year. If you were planning these expenses anyway, it may make sense to push them up to the end of this year rather than waiting. It’s important to remember that for cash basis taxpayers, any expenses that are accelerated will still count toward 2022, even if you don’t receive the services until 2023.
While expenses should be accelerated when possible, income should be delayed if possible. Lower income and higher expenses can help reduce your tax bill. Review all sources of income and see which ones can be put off until after the first of the year. Consider from a cash perspective whether it makes sense to allow customers to make payments in early January rather than in December for goods or services.
Maximizing deductions is an effective and simple way to reduce your tax bill. Review the financial numbers to see where you can take advantage of deductions, such as:
- Business-related travel expenses;
- Office expenses;
- Software subscriptions;
- Marketing expenses; and
- Charitable donations.
Deductions are a great way to reduce taxes now and in the future, so make them a part of year-end planning. There are times that a business owner has been doing various things throughout the year that could count toward a deduction, but they have not necessarily captured this information in their accounting software. A good accountant should be asking questions about additional deductions that may apply.