The end of 2016 is now clearly within sight. But even with the clock rapidly ticking down, there are still things you can do to minimize your tax burden if you run a small business.
Here are 7 end of the year tax tips:
- Defer income until January 2017. Any income you make between now and midnight on December 31st counts toward your 2016 income -- and profits. To lessen your 2016 tax liability, hold sending invoices until the end of the year so you’ll receive payment after the first of the year. (Note: This strategy only works if your company uses cash basis accounting.)
|"It's not enough to just withhold making deposits," notes Barbara Weltman, president of Big Ideas for Small Business, Inc. "The payments have to arrive after December 31st. Also, you want to make sure this deferral does not negatively impact your company's cash flow."|
- Pay your bills. To lower your yearly profit, increase your expenses. One way to do this is to pay off as many bills as you can before year's end. Even if you have bills or invoices that are not due until January, paying them now can help you reduce your 2016 tax liability.
- Accelerate business-related expenses. Another way to increase your 2016 deductions is to purchase any business-related equipment and supplies before the end of the year. Such expenses can include anything from vehicles, furniture and computers to reams of papers and boxes of pencils. In 2016, your business can earn up to a $500,000 tax deduction on the purchase of new or used office equipment, office the furniture and off-the-shelf software valued up to $2 million. Beyond $2 million, the deduction falls rapidly and disappears entirely after $2,010,000, so plan accordingly. Note: Purchases over the $500,000 limit can be written off using bonus depreciation (if the items are new) as well as regular depreciation.
"There’s also an election to write off up to $2,500 per item or invoice under a special de minimis safe harbor," Weltman adds. "This election simplifies record keeping, although the items cannot be added to the balance sheet. Your accountant will help you determine which write-off option works best for your situation."
- Check for inventory losses. Depending on your accounting methods, you may be able to take additional deductions for any inventory losses you have suffered over the year. (Check with an accountant about this.) If this is the case, take this opportunity to run a full inventory check to see if you have missing stock, the value of which you can write off against your profits.
- Max out your retirement plan contributions. If your company has an employee retirement plan, try to maximize your contributions before midnight December 31st. If you don't yet have a retirement plan, talk to your accountant about how to set one up. Such plans include the SIMPLE IRA, SEP IRA, 401(k) and profit-sharing. In addition to the deductions you can take for your contributions, your small business may also qualify for a credit for setting up the plan; it applies for the first three years of the plan.
- Make charitable contributions. In the spirit of the season, donate to a local charity. Such donations can be in cash or goods. For any donation of $250 or more, be sure to obtain a written acknowledgment of your gift. Note that a deduction for donations from inventory usually is limited to your cost, even if the value of the item is greater (there enhanced deductions for certain types of donations).
- Start getting ready for 2017. It's never too early for tax planning. "We all need monitor developments in Congress on tax reform that may impact 2017," Weltman advises.
"Meet with your accountant and/or bookkeeper to start planning for 2017 so you won't have to make last-minute tax savings decisions at this time next year!"
We hope you find these tax tips helpful. Be sure to check out 5-tips to help your small business avoid a tax audit. Also, if you have not checked your business credit report yet this year, be sure to visit smartbusinessreports.com.