Tax Planning Tips: Why You Need to Start Now!

Watch Your Wallet by Jarnocan
Watch Your Wallet by Jarnocan

When you cook, do you consult the recipe book after having already prepared the meal? When you have sex, do you wait until you’re done to put the condom on? What about, do you starting preparing your tax return after the end of the year? What do you mean, “two out of three ain’t bad?!”

If you wait until the year is over, or the sale is done, or you’re already dead then it is too late to plan and minimize your taxes. The savvy businessperson starts preparing before the year end, and seeks tax advice before planning any major sale, investment, or unusual business transaction. By taking the initiative, you open yourself up to different strategies and planning possibilities that could help help you keep more of your money in you pocket and out of the grasp of your greedy Uncle Sam. So let’s get started now! As Robert Kiyosaki likes to say, “your future is created by what you do today, not tomorrow.”

Get It Together

Have you ever gotten to the end of the year and wondered where the hell you put this invoice or why the hell a certain expense is so much higher than you anticipated? Also, do you remember the expenses that you wished that you had recorded for your 2009 tax season; records that you swore that you would have ready for 2010? The experienced businessperson keeps their financial records up to date and tracks their net income constantly. Mainly, she does this because she is in this for the money and she wants to make sure she is making plenty of it. As a bonus accurate and up to date financial records can help you plan for year end taxes and be proactive in minimizing your tax bill.

Remember, your financial records alone will not be adequate, come April 15th, to deduct your expenses for meals and entertainment and for the use of your personal vehicle for company business. You will need to document the business purpose of those meals and have a log of the miles that you drove in order to take those deductions.

Pay Tax Later, Keep Cash Now

Now that you have those records together, put them to work by taking a look at how your business is doing and planning out a tax strategy for year end.

One of the simplest, yet most effective tools of the taxpayer is to time their tax bill through timing the incurring of expenses and income towards the end of the year. If this year has been truly exceptional and you know that you will have a correspondingly huge tax bill, then you may wish to delay certain income items until next year or accelerate certain expenses that you were already planning on incurring next year into the current year.

Tax or accrual basis of accounting

I’ll try to explain this without getting super hyper-nerdy accountanty on you. Taxpayers come in two types, cash and accrual. If you are a cash basis taxpayer, like most individuals and some partnerships or corporations, then you realize income for your tax accounting when you actually receive the cash. So if you sell and deliver your product to me in December of 2010, but my dead-beat ass doesn’t pay you until January of 2011, then is not income for your taxes until your 2011 tax return is due.

By the same token, if I am also a cash basis taxpayer, I cannot deduct the expense for my taxes (assuming it was a business expense) until 2011, even though I received the good or service in 2010. Now, clever as you are, you may have already deduced that if I am an accrual basis taxpayer then I can deduct the expense of your product right away, even though I haven’t paid for it yet.

For an accrual basis taxpayer, to summarize briefly, the event that triggers the accounting of a transaction is the effective delivery (for a sale) or the effective receipt (for a purchase, or expense). That is a simplification but generally that’s the spirit of the rule.

If you file just file the income from your business right onto your personal tax return, usually on Schedule C, then you have the option to elect which accounting method you will choose, and 97.865% (my personal, non-scientific estimation) of filers choose the cash method, meaning they call it income when they get cash and an expense when they pay for something.

Delay the Gain, Delay the Pain – Revenue

It should follow then, that for a cash basis taxpayer, you only have to report revenue when you receive the cash. The simplest to lower your income in the current year is just to wait until January to send out your billing for December. Of course, you will eventually pay tax on that income but every sharp business person understands that a dollar today is better than a dollar tomorrow.

Stock Up – Expenses

There are two main ways of accelerating expenses into the current year. The first is obvious, just pay ahead for goods and services that you won’t need until next year. By prepaying, you’re getting the deduction now and your making your suppliers very happy.
The second method involves accelerating the purchases of equipment and machinery that you have budgeted for needing in 2011 into 2010. So if I buy that new iPad that I covet now instead of waiting until 2011, when I originally planned on purchasing it, I get to take depreciation on it for 2010. Here is the best part, the government lets small businesses take the full value of the purchase of most items right now, instead of taking a little each year as depreciation expense. You’ll find the rules for what qualifies and how much here on the IRS web site. Beware of special rules for the deduction of vehicles.

Beat Your CPA In a Round of Golf

By the end of the summer your accountant has totally recovered from the nightmares of the previous tax season and is tanned, relaxed, and in a talkative, almost jovial, mood. Take advantage by scheduling a meeting to talk a little tax planning for the 2010 season. Review your prior year’s tax returns, along with your progress so far in the current year, and see if there are changes that should be made. Now is the time to inform your accountant of changes that you either have put in place or are planning to see if a tax strategy makes sense. It is also time to revisit any quarterly estimate payments that she may have set you up with, to see if they shouldn’t be adjusted in light of new information.

Taking the bull by the horns and getting your tax information now can be an excellent investment of time and effort and really yield dividends come April 15th. So get your information together now and keep that money in your pocket, instead of Uncle Sam’s!