As the fiscal year of your small business winds down, you may find all of your attention turning to strategic planning for the next year, but don’t forget your tax deadlines are also quickly approaching. You want to make strong financial decisions ending the year so you can minimize your tax obligations for the current year. Follow these simple tips to leave more money in your pocket at tax time.
Accelerate Expenses and Delay Income
If you haven’t been keeping up with your earnings throughout the year, it’s a good time to take a look at the books. Any significant increase or decrease in what you’re making can have a dramatic impact on your tax filing. Specifically, focus on how your income balances out with any business losses, deductions, or credits you expect to claim.
A tax dollar deferred is a tax dollar saved. The Canadian tax system is based on an annual reporting of income, but the reality of business is that income and expenses aren’t always relying on how long it takes the Earth to circle the sun. Take advantage of this by doing two things: Accelerate some expenses, and defer some income. Money you spend before the end of the year can give you additional expenses to claim. Holding off on making more money, even just a few days, can let you wait another year before claiming that income.
If your cash flow allows for it, stock up on supplies and pay all of your bills in the last days of your tax year. This way, you can deduct them from your income right away, causing an instant tax reduction. If you company purchases something on December 30 and uses a December 31 year end, you can deduct the expense from the current year. Waiting just two days and purchasing the same item on January 1 means you have to wait 12 months to deduct the expenses at the end of the next fiscal year. The same applies to income. If you’re planning a service visit for a client around the holidays, waiting until after the first day of the following month can let you still recognize the income but defer it a year.
Invest in Business Improvements for Tax Savings
The end of the year is also a great time to take stock of how to invest in the long-term health of your business. Making capital investments to improve operations not only helps your business, but it can help reduce your tax liability if you do it before the end of the year. Organizations with unpredictable cash flow may need to finance those purchases. In this instance, you can build debt payments into your monthly expenses and amortize the cost of equipment, using it to offset taxable business income.
You can look back on the final quarter of the previous year to decide how many dollars to allocate to those business improvements. You might decide to add space or improve the quality of your existing space. Or you can allocate more dollars toward advertising and marketing efforts as the year winds down. You might also consider creating a web presence to shift some sales efforts from the physical marketplace to a virtual store that can offer products to anyone at any time. You can claim these expenditures as deductions in the current year while ramping up efforts for increasing sales in the upcoming year.
Another way to invest in your company while giving your business more expenses to claim on taxes is to upgrade the equipment you use on a regular basis. The CRA provides a tax break for business owners who make equipment purchases throughout the year. That includes things like machinery, office equipment, computers and computer software, vehicles, and office furniture. You can deduct the purchase price of these items, up to a certain limit. That’s a great incentive to make those equipment upgrades you’ve been putting off. When you make the purchase at the end of the year, you can claim the deduction for those expenses right away. You can then start the new year with fresh, upgraded equipment that can help you be more productive.
Investigate Capital Assets and Depreciation
Take a look at the capital assets on your balance sheet and their levels of tax depreciation. If you have not claimed the deduction for capital cost allowance in the past and the asset has lost value, perhaps you can claim it this year. On the flip side, if some assets are heavily depreciated but have held their market value, you may want to wait to sell them in the current year to avoid costly recapture. Depreciation for accounting purposes and depreciation for tax purposes are not the same; the two can have very different rates. Make sure to use the correct rate.
Maximize Your RRSP Contributions
Small business owners have a variety of retirement savings options to choose from. Aside from helping you grow your nest egg, these types of accounts also offer a tax benefit in the form of a deduction for contributions. If you haven’t maxed out your contributions for the year or you have yet to actually start saving, you’re missing out on a potentially valuable write-off. Every penny counts when it comes to scoring the most tax deductions possible, so there’s no reason not to save what you can.
In a year where revenues are high, making contributions to a Registered Retirements Savings Plan reduces taxable income while setting aside tax-deferred dollars for retirement. Contribute as much as possible to your Registered Retirement Savings Plan, since that is one of the few legal tax planning opportunities in Canada. If your business’ fiscal year ends on December 31, consider the possibility of paying yourself a bonus on the last day of the year and transferring it directly to your RRSP. This way, the company gets an immediate deduction, and you don’t pay taxes on the bonus. When using this strategy, make sure to account for your payroll taxes properly, since the bonus is the equivalent of a salary.
Organize Your Finances
Waiting until just before tax time to start organizing your financial documents can put you in a bind when it’s time to file. Trying to track down receipts or invoices at the last minute makes the process more difficult than it needs to be. If you’re missing a key piece of information, you run the risk of submitting an inaccurate return, which can increase your chances of an audit. Before the holiday shopping season gets into full swing, set aside some time to go through your files and weed out anything you don’t need. If you don’t have a set filing system, now’s the time to create one. Whether you choose the old-fashioned route and use a filing cabinet and folders or go high-tech with digital receipt-scanning software, the most important thing is to get your paperwork under control.
Donate to a Good Cause
The holiday season is all about giving, and you can help your bottom line by making donations in the form of cash or property to a qualified charity. As long as the donation meets the guidelines and you have the proper documentation to support it, you should qualify for a deduction of your adjusted gross income for the year. How you claim the deduction depends on your business structure. Work with your accountant to get the most out of this option.
The end of the year is an important time to make smart financial decisions that can help you get your taxes in order. QuickBooks Online can help you maximize your tax deductions. Keep more of what you earn today.