Tax Tips: Year-End Strategy Defer Revenue, Boost Spending | Rogersville
If you’ve made a profit projection for the year and your taxes will be higher than expected, this is a strategy you may want to consider for lowering your taxes.
If you use cash accounting for your income tax return, income is determined by the date you receive it. For businesses using accrual accounting, income is determined based on when it is earned. The vast majority of small businesses are on a cash basis and may have the option of deferring their income. The accounting basis of your business is shown on your income tax return. However, contact a tax professional if you are unsure of where to find it on the return.
If your business currently uses accrual accounting, you can switch to cash accounting by filling out Form 3115 to change the accounting method with the IRS. However, it would be a good idea to consult an expert tax professional before making the change.
You will need to stop billing clients and patients towards the end of the year. Customers and patients won’t pay you if you haven’t sent an invoice. By postponing December invoices and sending them in early January, you can lower your taxes by lowering your income.
Use the IRS Safe Harbor to pay your expenses up front. IRS Regulation 1.263 (a) -4 (f) contains a safe haven rule that allows cash taxpayers to pay and deduct qualifying expenses up to 12 months in advance without challenge from the IRS. Eligible expenses include lease payments on vehicles, rent payments on offices, and business insurance. Prepaying office rent and rent for up to one year in advance can allow you to significantly increase your deductions. Therefore, availing of this rule can have a huge impact on your tax liability.
If the rent deposit paid is causing a problem for your landlord, the rent deposit can be mailed on December 30th. By mailing the rent deposit on December 30, you can deduct it in the current year. This will make your landlord happy since he will receive the rent in the year he scheduled it. He will not have to declare the rental income a year earlier since he will not have received it until January. Use certified mail for payment in case you need to provide proof of the date you sent it to the IRS.
Before using this strategy, you should determine whether prepayment of expenses is a good idea. It will depend on your tax rate this year and your rate for years to come. Be aware of future changes in tax laws that could increase your taxes. If your income increases significantly next year, you might be better off paying your expenses upfront and maximizing your deductions for next year.
David Zubler is a tax accountant and registered agent in East Tennessee, providing tax strategies and representing clients before the IRS. He has over 25 years of tax experience. David can be reached at (865) 363-3019 or contacted by email at [email protected]