Businesses Should Plan Ahead for Year-End Tax Strategies

The tax code provides business owners with opportunities to reduce their tax bills right 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 foregoing significant tax savings that can be put to work in your business. There are two year-end tax strategies that, with proper planning, can have a positive impact on your cash flow this year and next.

• Defer income and accelerate expenses
• Purchase new equipment

Defer Income and Accelerate Expenses

This is a time-honored tax strategy that 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 with your tax advisor because the rules are different.

For income deferral, you need to look at your current year 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 next year. Generally, you only have to report income in the year you receive the cash in hand. To accomplish this, you simply wait until the final week of the year to issue some invoices so they will be paid in the next tax year.

For accelerating expenses, you move some expenses you would normally 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 the tax benefits of this strategy, it’s important to thoroughly assess your income picture for this year and next. While it may seem like a good idea to reduce your tax liability this year, you don’t necessarily want to create a bigger 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 completely for purchases over $3.5 million. The new law now includes the expensing of certain improvements made 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, it would be important to discuss your options with your tax advisor.

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 in a better position 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.

1IRS.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