As the end of 2017 nears, small business owners should consider strategies to maximize tax savings while increasing cash flow. Used wisely, these five tax strategies will help small business owners save on taxes, minimize tax liability and increase deductions.
1. Defer Income. Most small businesses are taxed on what’s known as a cash basis. A “cash basis” means when you receive cash or money from your customers, it's taxable in the year you received it. You also receive a deduction in the year expenses are paid. One way to minimize the income that comes in this year is to defer receipt of that income until the next year. For example, if you perform services for somebody in December, encourage your customer to pay you in January. That way you can defer income to 2018 and pay taxes on that income the following year.
2. Invest for the Future. Pay for expenses in advance for things you plan on using in future years. For example, purchase new vehicles for your fleet, computers, furniture or other major items you considered making next year now, so you can get the deduction for them. Additionally, if you have a depreciable asset like a car, furniture and fixtures, you may be eligible to take a full deduction using IRC Section 179. That allows you to deduct the complete amount you paid for an asset the year in which you purchased it. Finally, consider purchasing additional inventory – especially if you know that you're going to use that inventory, the inventory is going to be sold, or you have a client who will want to buy it. Accelerate your expenses in the current year to defer the benefit for future years.
3. Accelerate Retirement Contributions. If you and your employees have a retirement plan for your business, encourage your employees to accelerate what they will do to contribute before year end. If you have a matching program, you may have the ability to take a deduction for the amount you match. Also, if you offer bonuses or incentive pay and you're not an accrual base tax payer, consider paying the bonus before year end, so you can take the deduction on your business return. Note that an “accrual basis” means income is taxable when an income event has occurred but cash hasn’t been received yet. Expenses are deducted when they have been incurred or when they are owed.
4. Pay State Taxes Now. If you are taxed on a cash basis, you can get a deduction on state taxes paid before the year’s end. If you know you have a state tax liability for 2017 to be paid in 2018, make the payment before December 31 so you can take the deduction.
5. Be Charitable. Ever wonder why there's a line of people at Goodwill stores days before the end of the year? The simple reason is many people want to be able to take a tax deduction for items donated to charities. Make sure you talk to your tax advisor or CPA-enrolled agent to find out your eligibility and to determine how much you'll be able to deduct on your tax return.
Implementing the right tax strategies at the end of the year can put you in greater control of your cash flow – always a good plan when heading into a new year.
Ebong Eka is no stranger to the world of personal finance. As a certified public accountant and former professional basketball player he offers a fresh perspective on small business planning and executing. With over fifteen years of accounting, tax & small business experience with firms like PricewaterhouseCoopers, Deloitte & Touche and CohnReznick, Ebong provides practical money solutions tailored to the everyday person, the aspiring entrepreneur or the small business owner.
Ebong is the founder of EKAnomics, a sales, pricing and leadership firm. He is also the founder of Ericorp Consulting, Inc., a tax and management consulting firm. Ebong is the author of “Start Me Up! The-No-Business-Plan, Business Plan.”
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