Accrual-basis Taxpayers: Here are Some Year-end Tax Strategies
Record and recognize
The key to saving tax as an accrual-basis taxpayer is to properly record and recognize expenses that were incurred this year but won’t be paid until 2017. This will enable you to deduct those expenses on your 2016 federal tax return. Common examples of such expenses include:
- Commissions, salaries and wages,
- Payroll taxes,
- Insurance, and
- Property taxes.
You can also accelerate deductions into 2016 without actually paying for the expenses in 2016 by charging them on a credit card. (This works for cash-basis taxpayers, too.) Accelerating deductible expenses into 2016 may be especially beneficial if tax rates go down for 2017, which could happen based on the outcome of the November election. Deductions save more tax when tax rates are higher.
Look at prepaid expenses
Also review all prepaid expense accounts and write off any items that have been used up before the end of the year. If you prepay insurance for a period of time beginning in 2016, you can expense the entire amount this year rather than spreading it between 2016 and 2017, as long as a proper method election is made. This is treated as a tax expense and thus won’t affect your internal financials.
Miscellaneous tax tips
Here are a few more year-end tax tips to consider:
- Review your outstanding receivables and write off any receivables you can establish as uncollectible.
- Pay interest on all shareholder loans to or from the company.
- Update your corporate record book to record decisions and be better prepared for an audit.
The important overall message is that your books should properly reflect appropriate income and expenses. Therefore, having a tax professional to look over your books before year end could be helpful in anticipating tax obligations.
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