Every year, many business owners wait until April – or even August or October – to settle up with Uncle Sam for the previous year. In so doing, they face unexpected tax bills that crush company cash flow and incur unnecessary penalties and interest. What a waste!
The only way to prevent an “April Surprise” is to take time to plan tax-saving moves by the year’s end. Meet with your company’s accountant today to take these 10 important steps.
1. Forecast this year’s taxable income, both company and personal. Using monthly company financial statements and your own check stubs, get with your accountant now and estimate this year’s tax bill. Don’t overlook any special income this year from stock or real estate sales or retirement plan withdrawals.
2. Factor in your “business entity type.” There are so many – sole proprietorship, S Corporation, C Corporation, LLC, Partnership, etc. Each affects your taxes in a different way, and your adviser must consider this as you ponder year-end strategies.
3. Know your “basis of accounting” and what it means. Your accounting is either “cash basis” or “accrual basis,” and it’s essential to know which one in order to plan year-end decisions. For example, on the cash basis, you must actually pay a bill to get a tax deduction. On the accrual basis, you must simply incur the expense on account to secure the write-off.
4. Decide which way to shift taxable income and deductions. If you believe your income next year will be higher than this year, you might want to accelerate income into this year. Conversely, if you forecast a lower income next year, you might want to push off income.
5. Consider equipment purchases. Should your tax projection show the need to lower taxable income, buying equipment during December might allow you to take advantage, if you are eligible, of the $24,000 special accelerated write-off known as “Section 179.”
6. Weigh expense strategies. Consider replacement or repair moves on the trucks or year-end compensation moves for employees. Kick the tires – literally – to see whether you should replace them now rather than in January. Depending on your basis of accounting, certain repairs and supplies purchases may make sense. For incentive compensation, the timing of the payment – December or January -have big tax implications for the company and the individual.
7. Look into retirement savings. The best tax shelter is still a company or personal retirement plan. You get to pocket your money and take a tax deduction. Some retirement plans even offer the benefit of waiting until the subsequent year to finalize and pay the contribution for the previous year, providing a great cash flow benefit.
8. Consider investment transactions. List all stock sales and determine the “cost basis” or purchase price for each sale. Now, ask your broker for a listing of “unrealized gains & losses” and forecasted mutual fund distributions. Making additional trades in December can dramatically save taxes.
9. Don’t forget estate tax planning. From your personal net worth statement, check again to ensure that you have divided assets between you and your spouse (and perhaps your children) in a beneficial way. Consider making gifts by the year’s end.
10. Set a plan to “stay on top” next year. Work with your company accountant to budget next year’s profit & loss, and ensure that taxes are recorded in your company financial statements. Then, make plans that regular payments or reserves are made. In this way, you can work to prevent the “April Surprise” all year long.
SmartMoney.com’s “Year End Tax Planning (That Works Year Round)” has some maneuvers that are especially useful come year’s end. www.smartmoney.com/tax/advice/index.cfm?story=yearend
Kenneth Dewitt is a CPA and certified financial planner who serves as a part-time chief financial officer for a variety of businesses, including trucking companies. E-mail kdewitt@eTrucker.com.