Business Tax Planning – It’s All About Timing

Ideally, saving money on business taxes means deferring those taxes as long as possible. One way to accomplish this is to control when your business recognizes income and when it incurs deductible expenses. Below, we outline two strategies that can help businesses improve this timing:

  1. Defer income to next year. Does your business utilize the cash method of accounting? If so, you can defer billing for your products or services. Likewise, if your business uses the accrual method, you can simply delay shipping products or delivering services.
  2. Accelerate deductible expenses into the current year. If you’re a cash-basis taxpayer, you may make a state estimated tax payment before Dec. 31, so you can deduct it this year rather than next. Both cash- and accrual-basis taxpayers can charge expenses on a credit card and deduct them in the year charged, regardless of when the credit card bill is paid.

One important thing to note is that if you believe your business will be in a higher tax bracket next year (you expect an increase in your taxes), then we recommend an opposing strategy – increase your income by billing for products and services right away and defer your deductible expenses to the next year. This would mean a higher tax bill this year, but an overall savings if your bracket increases next year.

If you believe you will be in the same tax bracket next year as this year, any taxes you defer this year is like an interest free loan from the IRS.  Also, why pay taxes any sooner than you absolutely have to.  If your income fluctuates significantly from year to year, the strategy gets much more complicated.

If you’d like to better understand how these strategies will work with your specific business finances, contact us for a tax planning review today!

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