5 Ways to Prepare Your Business for the New Year
As they approach December 31, businesses are scrambling to reduce their tax burdens and optimize for the coming year. Here are some smart ways to do both
Defer Income: Obviously, any income your business receives by December 31 will count on this year's taxes. By shifting income to after the New Year, however, you could potentially save a lot of money, depending on your individual income levels for each year. Talk to your accountant to see if this is a viable option for your business.
Make Purchases: Now is a great time to invest in your business to maximize deductions. Do you need new office supplies or equipment? Are there any vendors you might be able to pay in advance? Figure out how much you stand to owe, and then see if you can reduce this amount by making a few strategic purchases. New equipment can also help you enhance operational efficiencies in the year to come.
Check Inventory: If market values for your inventory have declined, you could potentially claim more deductions. That said, this all depends on your accounting methods, so be sure to talk to your accountant to see if this is a reasonable possibility.
Start a Retirement Plan: You can reduce your income for the current year by creating and paying into a retirement plan before December 31. If this is something you've been putting off, talk to your financial advisor to determine if it's a good idea to do it before or after the New Year. For example, if you have already minimized your current tax burden, it will make more sense to wait until after January 1 to pay into your retirement plan.
Analyze Your Margins: Search for areas where your margins are being squeezed and dig deep to see what exactly is going on. Look at employee costs and vendor prices to see if you can lower expenses. Assess the entire financial health of your company and think about leveraging your credit to get the equipment and talent you need to thrive in the coming year.
Things to Consider
In some instances, it may not make sense to invest in your business to minimize your tax burden. Since a $1 deduction typically only amounts to no more - and many times much less - than $.60 worth of tax saved, it's not a good idea to purchase things you don't need. On the other hand, if you've been waiting to finance necessary investments, the end of the year is a fine time to pull the trigger. Still, if your profits were lower than expected for the current year, you may get more benefit by waiting until the following tax year to make business-related purchases.
If you do decide to adopt an aggressive year-end tax strategy, be sure you are really spending and not just moving money from one place to another. Bear in mind that you will not enjoy any tax deductions for paying down credit lines or giving yourself a bonus. To qualify for deductions, you must be buying equipment or paying expenses that will actually help you improve or maintain your business operations.