It’s the holiday season, and you’re likely juggling a lot of tasks, both personal and professional. I hate to add more tasks to your list, but December is the perfect time to review your financial situation and make some tax-planning moves to minimize your tax bill. Here are 10 steps every small business owner should take now to start the new year with a new and improved tax outlook.
1. Keep Up-to-Date on Tax Law Changes
You can’t monitor every single modification to tax law—that’s the job of your accountant and/or tax preparer. You should, however, stay abreast of major changes—including proposed changes—affecting small businesses. Reading business news headlines regularly should alert you to anything significant.
2. Know Your Filing Date(s)
Recent legislation may affect the filing date for your 2015 tax returns. Tax returns for calendar-year partnerships are now due March 15 instead of April 15, and tax returns for calendar year C corporations are now due on April 15 instead of March 15.
3. Automate Accounting and Record Keeping as Much as Possible
Most of us dread tax time because of all the paperwork we have to gather and organize. Eliminate this headache by automating as much of your accounting as you can. Start now, and you’ll be on track for next year. Use a cloud-based accounting software application, such as QuickBooks, that syncs with your bank account and automatically categorizes and reconciles your credit card and bank transactions.
Better yet, add an app that tracks your expenses by taking pictures of receipts on your smartphone, then uploads them to the cloud. If you use mobile payment processing apps, such as PayPal or Square, get accounting software that syncs with them, too.
4. Use the Cloud
When you use cloud-based accounting software to organize your financial information, you and any authorized employees can easily access it securely, wherever you are. You can also share your financial records with your accountant and/or tax preparer, which can greatly simplify preparation ahead of tax time.
5. Defer Income and Accelerate Deductions (Maybe)
Whether your business is a partnership, sole proprietorship, limited liability company (LLC), S corporation or C corporation, the individual and corporate federal income tax rates are scheduled to remain the same in 2016 as they are this year. That means:
- If you expect your business to be in the same tax bracket or lower in 2016, defer revenues until next year so that you won’t pay taxes on them until you file for 2016. Accelerate your expenses into this year, so you can enjoy the deduction now.
- If you expect your business will be in a higher tax bracket next year than it is this year, accelerate revenues into 2015 so they’ll be taxed at this year’s lower rate. Postpone deductible expenses until next year so you can enjoy the deduction when your tax rate is higher.
To defer income, wait until the end of December to invoice your customers, so that you won’t get paid until 2016. To accelerate expenses, pay bills by December 31, even if they’re not due until January.
If you use the cash basis method of accounting, you can defer expenses by using your credit cards to pay vendors or other business expenses in December so you won’t actually pay the bill until next year. Or you can mail checks to your vendors at the end of December so they won’t be cashed until January.
6. Assess Your Accounting Method
In the cash method of accounting, you record income and expenses on your books at the time the money changes hands. In the accrual method, you record income and expenses at the time the sale is made or the expenses incurred, even if no money changes hands for months. Whether you use the cash or accrual basis can make a big difference to your taxable income. If you don’t know which method you’re using, check Line F of your business’ first Schedule C submission.
Small business accounting software generally enables you to create reports showing the difference between cash basis and accrual basis accounting, so you and your accountant can determine whether switching from one method to another is a good idea for the coming year. If you want to change it, you’ll need to submit an application to the IRS, so allow plenty of time for this process.
7. Max Out Your Retirement Plan Contribution
Why not give your money to yourself instead of to the taxman? Making a pre-tax contribution up to the maximum amount allowable for 2015 will reduce your taxable income for this year. You have until December 31 to make your 401(k) contributions and until April 15 of next year to make IRA contributions.
8. Give Back to the Community
Another way to accelerate your expenses in 2015, if you need to do so, is to make a contribution to charity before the end of the year. Choosing a local charity can endear you to your customer base in addition to providing a tax break. Just make sure that the organization you choose is qualified.
9. Plan for All Contingencies
Adding to the headache of small business tax preparation for 2015, as of November 30, Congress had yet to renew some 50 business tax credits that have expired—and they have until December 31 to do so. Among the credits affecting small business owners are:
- Section 179 deductions: Businesses used to be able to deduct up to $500,000 worth of new equipment or software in the year in which the purchase was made; that limit has dropped to $25,000.
- Bonus depreciation: This tax credit, which allows deductions of up to 50% for qualified purchases of business property in the year of purchase, expired at the end of last year.
- Work Opportunity Tax Credit: This tax credit allows small business owners to deduct part of the cost of hiring employees in certain target groups, such as military veterans, people on SSI or recipients of food stamps.
It remains to be seen whether all of these credits will be extended or not. If they don’t get extended until, say, December 30, it will be too late to do much about it. Have your tax preparer calculate your tax liability both with and without these and any other expired tax credits that are relevant to your business. This way, you’ll have informed choices to make no matter what Congress decides to do.
10. Put Aside Money to Pay Your Tax Bill
Many small business owners run into trouble when they can’t pay their taxes in full, and have to start paying fines and penalties. Prevent this nightmare by setting up a separate bank account for your taxes. With an estimate of your tax liability in hand, set aside a certain amount of money every month or every quarter, so you’ll be ready to write that check come April.
For more tax-time tips, see our guide to taxes for the self-employed.