As we get closer to year end, we are starting to get a much better picture of your 2013 business income. For those of you in a profit position, with some cash flow to play with, there are a few key tax planning strategies you should consider:
Defer Income to 2014
If it makes more sense for you to pay less taxes this year instead of next, you can defer income that may have been due to you in 2013 by allowing customers to pay in January. For cash basis taxpayers (which is most small businesses), income is not recognized from a tax perspective until the payment is received. If a customer pays you on 1/1/14, it is 2014 income, even though they were invoiced in 2013.
Before moving forward with this strategy, you should take into consideration your growth plans for next year. If you are expecting higher sales and profit overall, you may be better off taking the income now.
Checks written, credit cards charged, or any other purchases made prior to and on 12/31/13 are 2013 expenses and will reduce your taxable income in the current year. Why not purchase office supplies, make a charitable donation, or pay a bill early instead of waiting until next year.
Make Capital Purchases
This concept includes the much publicized “strategy” of making equipment purchases at the end of the year. In the current tax code, equipment purchases (up to a pretty high limit) can be expensed in full in the year they are purchased instead of requiring them to be depreciated over their useful lives. These provisions are set to expire or be reduced almost every year, so the standard tax advise is to take advantage in the current year as we never know what the future will bring.
Of course, you should consider whether or not the asset will provide value to your business and if you have the funds to pay for it.
Make Retirement Plan Contributions
Self employed retirement plans provide a huge tax savings benefit. The typical plan allows you to contribute about 20% of your net business profit to a retirement plan. In turn, the amount contributed reduces your taxable income dollar for dollar while you are saving for the future.
You can make 2013 retirement plan contributions as late as April 15th 2014 and it will still count towards your 2013 taxes. This gives you an opportunity to make a decision about a plan or an exact contribution amount right before your tax return is complete and you have a full picture of your tax liability.
What is Different This Year
Payroll tax (FICA) rates are back to their “pre-stimulus” levels. This means that self-employed individuals will see a 2% higher self-employment tax liability on their tax return for 2013. Just something to keep in mind. If your business income is the same or slightly lower this year, you may still be paying more tax.
Take the time to think through where you can apply these strategies and reach out if you would like to talk through you options. The sooner the better!