The year is almost over and tax season is looming on the horizon. What can you do before December 31 to reduce this year’s tax bill? Plenty.First, you must get the big picture. Assuming you’ve been…
The year is almost over and tax season is looming on the horizon. What can you do before December 31 to reduce this year’s tax bill? Plenty.
First, you must get the big picture. Assuming you’ve been faithfully tracking income and expenses during the year, it’s time to print out an Income Statement (aka Profit & Loss Report or P&L) and see where you stand.
If you don’t have all your 2015 transactions input into your bookkeeping software program, it’s critical that you get that done right away, otherwise you’ll end the year without knowing what the numbers look like, and you’ll miss out on a great tax-saving opportunity. And you’ll also enter 2016 without a clue as to what your tax situation looks like. If you’ve got a balance due on the 2015 return, the sooner you realize that, the better.
Once you’ve got your Income Statement in front of you, compare the bottom line to 2014. Was 2015 better or worse than 2014? If you had a better year and are showing an increase in profit, you still have time to do something about it.
There are only two ways to reduce taxable income: reduce sales or increase expenses. Now that 2015 is just about history, there’s not much you can do to reduce sales (and why would you want to do that anyway?). But you can increase expenses during the last few days of the year by making additional purchases, assuming the cash is available to do so.
So make a list of legitimate business items that you were planning to buy in 2016, and buy them in 2015 instead. This would include smaller things like office supplies (stationary, paper and the like) as well as bigger ticket items like office equipment (computers, printers, fax machines, etc).
With regard to office equipment, keep in mind that you can take advantage of the Section 179 deduction on assets purchased by 12/31. This means you can avoid the quagmire of depreciation rules and simply deduct something like a computer in the same way you deduct paper clips – it is fully deductible in the year of purchase rather than expensing it via depreciation over several years.
In addition to supplies and equipment, you can also increase expenses in 2015 by pre-paying expenses that are not due until 2016. Here are some examples: advertising, utilities, rent, and insurance. Perhaps you’ve received a bill for these items in 2015 but payment isn’t due until January. Go ahead and pay it now.
One final comment: Keep in mind that if you wait until 2016 to make these purchases, you’ll get the same deduction and the same resulting tax savings (assuming you’re in the same tax bracket). So what’s the benefit? Timing. Think of it like this: I have $350 and I’d like to give it to you. When do you want it? Now or later? Probably now, right?
Well, if you have $1,000 to spend on business deductions and you are in the 35% tax bracket, the IRS has $350 it would like to give you. When do you want it? This year or next year? It’s up to youHealth Fitness Articles, but good business sense would say to take it now. Get the money a year earlier and use it to your advantage.