Many small business owners do not start thinking about their income tax deductions until December 31st draws near. Then, with the end of the year around the corner, there is a sudden flurry of activity as they scramble to increase their deductible expenses.
Small businesses, which often deal with tight cash flows and small profit margins, stand to benefit a lot from a full reduction in their tax payments. But to do so requires planning and foresight that really extends throughout the year.
Here are several tips on what you can do at the end of the year and throughout it, to maximize your small business’ tax deductions. Since the conditions may vary depending on the unique circumstances of your business, you should consult with an accountant or professional tax consultant before making any decisions.
1. Efficient financial accounting. Before we can talk about how to maximize your small business tax deductions, you need to have an accurate picture of your company’s financial situation. Your books should be clear and up to date. You should also have a system for collecting and filing any receipts for business expenses. Finally, you need to be on top of your cash flow, namely accounts payable, accounts receivable, and inventory.
2. Hire a tax consultant. Hiring an accountant or a tax consultant, is good business practice- especially if you are unfamiliar with basic business accounting. Hiring such a professional is also a tax-deductible business expense, and the tax advice you will receive should help pay for the cost.
3. Increase your expenses. By increasing your expenses before the year ends you can maximize deductions for this year. Obviously, you will be limited by your available cash flow. If there is money available then you could do the following:
- Purchase items your business will require in the immediate future, such as office supplies
- Pay any outstanding bills, such as rent or utilities, early
- Take care of any repairs or maintenance that you have been putting off
- Make any business trips to existing or potential customers
4. Make year-end equipment purchases. If plan on buying buying new office equipment or furniture, then consider purchasing it at the end of the year. You will then have to decide whether you want an immediate write off or a depreciation that is spread out over the next few years. Keep in mind that to claim the deduction, your equipment needs to be set up and in use by year-end.
5. Delay or defer income. Any income that is expected in December, but can be deferred to January, will lower your yearly business income. If your income is smaller, then the taxes you will have to pay will be accordingly reduced.
6. Contribute to a retirement plan. Making payments to a retirement plan is another good way to reduce your tax obligation. If you do not currently have a retirement plan then consider setting one up before the end of the year. In the US there are several plans to choose from, each with their own terms and conditions, so make sure to check these out beforehand.