2012 Practical Tax Planning: Simple Business Strategies
Here are a few year-end tax-planning strategies. These are meant to suggest potential area’s to save, but many have specific requirements. Be sure to implement the strategies with professional advice from a tax expert – this is not a do-it-yourself project.
Don’t under report your deductions just to “look better”. If your business deductions exceed your business income, you have a loss for the year – tax law calls this a “net operating loss” or NOL. The good news is tax law allows you to carry back the NOL for two years and get refunds from taxes previously paid. If after going back for two years you still have unused losses, you can carry them forward for up to 20 years. This means that you should never stop documenting your deductions and you should always claim your rightful deductions.
Shift Income into 2013. Here is a simple strategy to reduce your taxable income for this year: Stop billing your customers until after the year end (on a cash basis on the calendar year.) Customers can’t an invoice they have not received, and no invoice means no incoming cash payments, and no taxable income. This is a time-tested tax-planning strategy that’s been used successfully for years.
Prepay 2013 expenses. IRS Regulation 1.263(a)-4(f) contains a rule that allows a cash-basis taxpayer to deduct qualifying prepaid expenses up to 12 months in advance (under this safe harbor rule, the 2012 prepayments you make may not go into 2014.) For a cash-basis taxpayer, qualifying expenses include, among other things, lease payments on business vehicles, rent payments on offices and machinery, and business and malpractice insurance premiums.
Make sure you are thinking about proof. How do you prove that you mailed a check on December 31? Send the check by certified or registered mail – the postal receipt will show the date it was mailed. When you think about your taxes, always think proof. When thinking about proof, think like an IRS auditor.
Darrel Whitehead, CPA
Buy office equipment that qualifies for Accelerated Depreciation. Qualifying Section 179 purchases include new and used personal property such as equipment, computers, desks, and chairs. Assuming you want deductions this year, the combination of Section 179 expensing and 50 percent bonus depreciation makes this a very good year to buy Section 179 assets.
Follow the rules to deduct Credit Card purchases. If you are a sole proprietor, the day you charge a purchase to your business or personal credit card is the day the expense is deductible. Therefore, consider using your credit card to buy office supplies and other business necessities. If you operate your business as a corporation, and if the corporation has a credit card in the corporate name, the same rule applies: the date of charge is the date of deduction for the corporation. But if you operate your business as a corporation and you are the personal owner of the credit card, the corporation must reimburse you for the corporation to realize the deduction. Thus, submit your expense report and have your corporation make its reimbursements to you before midnight on December 31.