For small business owners (most commonly a sole proprietorship or partnership), there are a number of year-end strategies that can be applied to reduce the amount of income tax payable, including:
1. Do a ‘Financial Check-Up’: A small business specialist, accountant, and investment adviser can help owners make sure they have a clear understanding of their current financial situation. These professionals can also help develop or adjust existing plans based on new needs or changing circumstances.
2. Defer Income: Depending on a number of factors (e.g. future tax rates, projected profit or loss for tax year, cash flow), small business owners may be able to reduce the current taxes they will be paying by deferring some of the income they expect to receive in December, into January of next year.
3. Gather Business Receipts and Increase Expenses: Maximize income tax deductions by ensuring all allowable receipts for business-related expenses (e.g. gas, stamps, customer lunches, coffee for the office) are itemized. Over the course of a year, those receipts for the little things can add up. Business owners can consult the guidelines available from the Internal Revenue Service, or speak to their professional tax adviser about eligible business expenses.Business owners can also increase some expenditures now on things they will need early in the year, in order to maximize last years deductions.
For example, consider accelerating the purchase of new equipment or other depreciable assets before the end of the year; you could benefit from a claim for tax depreciation in the current year.
4. Consider Inventory Write-offs: A drop in the value of inventory may also provide an opportunity for an additional income tax deduction for the current year. It is important to speak to a banking adviser and your accountant about the tax rules that apply to your particular situation.
5. Set-up a New SEP, and make the Maximum Contribution to an IRA: For unincorporated small business owners, income earned by the business becomes personal income when filing taxes.
Many small business owners fail to take full advantage of the best income tax deduction available – the SEP. SEP contributions are deducted from annual income, thereby lowering income tax payable at the individual’s marginal tax rate. Now is a great time to set up a new SEP or make a contribution to an existing plan for the year to benefit from the tax-deferred growth right away.
The process is simple, quick and can be done at any bank branch. Making an SEP contribution does not typically preclude you from also making a contribution to an IRA.Depending on your particular tax situation, a contribution to a Traditional or Roth IRA may also be deductible.
Even if you don’t qualify for the tax deduction, the earnings will remain tax deferred until withdrawn. Be sure to consult with your tax adviser to determine the best retirement plan for your particular situation.
Latest posts by A. Dinsdale - Managing Editor (see all)
- Recruiting Strategies for your Small Business - February 10, 2014
- Business Expansion Considerations For Today’s Economy - January 23, 2014
- Five Current Start-Up Tips For A Successful Business Enterprise - November 27, 2013
- A Guide to Writing Your Small Business Plan - November 7, 2013
- 3 Ways To Take The Stress Out Of Organising Corporate Travel - October 22, 2013