The fourth quarter is a busy time for small business owners. Whether you’re swamped with last-minute orders, celebrating the season with customers and colleagues, or starting to close the books on another year, it’s easy to put off thinking about taxes.
However, now is an ideal time to sit down with your accountant to review what you need to do to minimize your company’s tax liability and make sure you wrap up the year on fiscally sound footing. In light of the new tax legislation passed last year, known as the Tax Cuts and Jobs Act or TCJA, it is especially crucial that you calculate your business income correctly, take advantage of all the deductions available, and meet your payment obligations.
Smart small business owners consider tax planning a year-round activity, not a once-a-year event. Waiting until the last minute can make tax preparation more complicated and even limit your money-saving options. With that in mind, here are five year-end tax preparation steps you can take now:
1 – Defer Income
Small business owners have some flexibility over when they receive their income. Deferring revenue during the last part of the year to after January 1st is a strategy that can reduce your 2018 tax bill and potentially save you a significant amount of money.
If you can afford to wait, consider billing your customers and clients late in December or delaying the delivery of certain products or services until January. Make sure it won’t add to next year’s tax burden or cause financial problems in the months ahead. On the flip side, if you expect your business to be more profitable in 2019 than it was this year, consider accelerating cash collection before December 31st and delaying deductible expenses until after the New Year.
2 – Maximize Deductible Expenses
If you are in a position to pre-pay expenses that can be deducted from your business income, consider doing so. This might include making vendor or advertising payments in advance, leasing a vehicle, stocking up on office supplies, or giving your employees their year-end bonuses before December 31st.
It is also a good time to take advantage of larger deductions on equipment purchases. Some business equipment falls under Section 179 of the Internal Revenue Code, which allows business owners to deduct capital assets immediately rather than depreciate them over several tax years. The 2018 deduction limit is $1 million, which is nearly double last year’s amount.
Companies that spend less than $2.5 million on qualifying business equipment purchases are eligible for this tax break, which lets you deduct the value of equipment you buy or finance and put into use between January 1 and December 31 of the tax year you are claiming. Because Section 179 is designed to support small businesses, most of the equipment you will purchase, finance, or lease qualifies for the deduction. Also new for 2018: the deduction applies to purchases of used as well as new equipment.
3 – Plan for Paying Taxes
The sooner you have an idea of your business outlook for the tax year, the better prepared you can be to prevent cash flow disruptions, either by putting money aside or arranging for a line of credit to pay the IRS. Ask your accountant whether you would be better off paying quarterly estimated taxes, which lets you distribute the tax burden throughout the year instead of facing a single large payment in April. Many small businesses need to pay estimated taxes to avoid interest and IRS penalties.
When you need to pay business income taxes, a working capital loan is an option for bridging your cash flow. Summit Financial Resources offers custom financing solutions that involve using your accounts receivable and other assets as collateral. We can mix and match from a variety of products to suit your needs, including invoice factoring, asset-based lending, inventory lending, and equipment financing.
4 – Contribute to Your Retirement Plan
Now is the time to max out your contributions. Make payments to your retirement plan before December 31st to reduce your income for this year, and encourage your employees to do the same.
Regularly employed individuals can contribute to a 401(k) plan and/or participate in an IRA (traditional tax-deductible or Roth). A small business owner can have a SEP (Simplified Employee Pension), a solo or individual 401(k) plan, and a savings incentive match or SIMPLE IRA. These offer the opportunity to shelter more of your income from taxes. If you haven’t yet set up a retirement account, talk to your financial professional to determine which plan is best for your business.
5 – Get Organized for Next Year
Ideally, small business owners should carefully track expenses and sales throughout the year. Keeping your finances in order will help you manage your budget and cash flow, simplify year-end tax preparation, and allow you to maximize tax deductions and minimize errors. If staying organized is an ongoing challenge for you or your staff, budget for the purchase of an accounting software solution to automate the process in 2019.
The earlier you begin your tax planning, the easier the process will be. The new tax legislation has made significant changes to the income tax laws for 2018 and beyond, and the IRS website offers detailed information about how tax reform will impact small businesses. However, small business owners should consult a licensed CPA or other tax professional to discuss their tax liability rather than trying to interpret tax codes on their own. Keep in mind that tax burdens vary by state and local jurisdictions in conjunction with the IRS’ taxation policies, and small business owners should have a plan for dealing with their liabilities and expenses heading into 2019.
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Summit Financial Resources specializes in working capital financing for small to medium-sized businesses that need increased cash flow. We provide working capital financing through invoice factoring, asset-based lending, inventory lending, and equipment financing.