The last month or so of the year offers accrual-basis taxpayers an opportunity to make timely moves that might enable them to save money on their 2016 tax bill.
Record & recognize
The key to saving tax as an accrual-basis taxpayer is to properly record and recognize expenses that were incurred this year but will not be paid until 2017. This will enable you to deduct those expenses on your 2016 federal tax return. Common examples of such expenses include:
- Commissions, salaries, & wages
- Payroll taxes
- Advertising
- Interest
- Utilities
- Insurance
- Property taxes
You also can accelerate deductions into 2016 without actually paying for the expenses in 2016 by charging them on a credit card. (This works for cash-basis taxpayers, too). Accelerating deductible expenses into 2016 may be especially beneficial if tax rates go down for 2017, which could happen based on the outcome of the November election. Deductions save more tax when tax rates are higher.
Look at prepaid expenses
Also review all prepaid expense accounts and write off any items that have been used up before the end of the year. If you prepay insurance for a period of time beginning in 2016, you can expense the entire amount this year rather than spreading it between 2016 and 2017, as long as a proper method election is made. This is treated as a tax expense and thus will not affect your internal financials.
Miscellaneous tax tips
Here are a few more year-end tax tips to consider:
- Review your outstanding receivables & write off any receivables you can establish as uncollectible
- Pay interest on all shareholder loans to or from the company
- Update your corporate record book to record decisions & be better prepared for an audit
Consult us for more details on how these and other year-end tax strategies may apply to your business.