The end of the year is coming up fast. Now's your last chance to make decisions for your 2017 tax return. Gail Rosen, CPA, a small-business tax specialist and shareholder with Wilkin & Guttenplan P.C., shares her year-end tax planning tips for business owners.
General Strategy: Defer Income, Accelerate Expenses
If business owners want to lower their 2017 tax bills, they can do so by either deferring income until 2018 or accelerating expenses to receive more deductions for 2017.
Rosen points out that this strategy can be even more beneficial for 2017 because Congress is considering tax reform to lower future tax rates. "I don't have a crystal ball and can't say for sure, but there's a chance tax rates could go down next year," she says. "If that happens, business owners may pay less in total taxes by delaying income and accelerating deductions."
Rosen warns, however, that this strategy doesn't make sense for every situation. "If you expect to earn more and be in a higher bracket next year, don't defer income. Keep the income for 2017, when you're in a lower tax bracket."
Ways to Defer Income
When you set up your business, you elect an accounting method for when to recognize income. Under the cash system, you earn income when you receive money from your customers. So it's possible to defer income by waiting until next year to send out some invoices.
Under the accrual system, you record income when it's earned. So, similarly, you can defer income by holding off on completing some orders, for instance delaying a few shipments until the first week of January.
And if you're looking to sell a business asset that's appreciated in value or has been fully depreciated — a building, for example — you can defer income by waiting until 2018 to make the sale.
Ways to Accelerate Expenses
Under the cash system, your expenses are deductible for the year when they're paid. You can lower your 2017 taxes by paying as many bills as possible before the end of the year. Don't save them until 2018.
Within reason, you can also prepay some expenses. "You could prepay one month of next year's rent in 2017 to get a bigger deduction," says Rosen, "but you can't prepay six months."
You don't have this same flexibility under the accrual system because expenses are only deductible when they occur, not when they're paid. Your January electric bill would only be deductible in January.
If you have any retirement plans like a 401(k) or IRA, contribute as much as you can by the end of the year to maximize your deduction.
There are also some helpful year-end tax moves you can make with your personal finances. If you have any investments that have lost money in a taxable brokerage account and it makes financial sense to sell, you can do so for a tax deduction. According to Rosen, "You can claim up to $3,000 in investment losses as a personal tax deduction, once you fully offset any capital gains recognized during the year."
If you plan on giving money to charity, Rosen recommends making your charitable donations by the end of the year in order to receive a tax deduction for 2017. Finally, if you have any stocks that have gained value, consider giving them to charity in lieu of cash. You won't owe income tax on your investment gains but will receive a tax deduction for the full value of the shares.
Pay Your Estimated Taxes
Rosen reminds business owners that they might need to increase the withholding on their paychecks or make estimated tax payments because the IRS and state governments require you to pay a minimum amount of tax over the course of the year to avoid a penalty. Due to potential tax law and alternative minimum tax (AMT) consequences, however, you should review your situation with a tax professional before you pay any additional state taxes this year.
There are two ways to avoid the penalty. On the one hand, you can pay 90 percent of your total taxes for 2017. On the other, you can pay 100 or 110 percent of what you paid in taxes for 2016. The percentage depends on your adjusted gross income.
Finally, the end of the year is the perfect time to reach out to your tax advisor. Your advisor is the perfect person to go to if you have questions about year-end tax planning or your upcoming return.
This article provides general information, and should not be construed as specific legal, HR, financial, insurance, tax or accounting advice. As with all matters of a legal or human resources nature, you should consult with your own legal counsel and human resources professionals. ADP shall not be liable for any direct, indirect, special, consequential, incidental, punitive or exemplary damages in connection with the use by you or anyone of the information provided herein.
Featured on THRIVE
SIGN UP FOR THE THRIVE NEWSLETTER