Year-end strategy defer revenue and accelerate expense
If you have made a profit projection for the year and your taxes will be more than you had anticipated, this is a strategy that you may want to consider to reduce your taxes.
If you are using the cash basis for your tax return, revenue is determined by the date you receive it. For businesses using the accrual basis, revenue is determined based on when it is earned. The vast majority of small businesses are on the cash basis can have the ability to defer revenue. The accounting basis of your business is reported on your tax return. However, contact a tax professional if you aren’t sure where to find it on the return.
If your business is currently using the accrual basis, you can change to the cash basis by filing Form 3115 to change the accounting method with the IRS. However, it would be a good idea to consult with an expert tax professional before making the change.
You will need to quit billing customers and patients near the end of the year. Customers and patients won’t pay you if you haven’t sent a bill. By postponing the December bills and sending them in early January, you can reduce your taxes by reducing your income.
Use the IRS Safe Harbor to pay your expenses in advance. IRS Regulation 1.263(a)-4(f) contains a safe harbor rule that enables cash-basis taxpayers to pay and deduct qualifying expenditures up to 12 months in advance without challenge by the IRS. Qualifying expenses include lease payments on vehicles, rent payments on offices, and business insurance. Prepaying office rent and lease payments for up to a year can enable you to significantly increase your deductions. Consequently, taking advantage of this rule can have a huge impact on your tax liability.
If the advance rent paid payment will cause a problem for your landlord, the advance rent can be mailed on December 30. By mailing the advance rent payment on December 30, you can deduct it in the current year. This will keep your landlord happy since he will receive the rent in the year he expected it. He won’t have to report the rental income a year early since he won’t have received it until January. Use certified mail for the payment in case you need to provide proof of the date you mailed it to the IRS.
Before using this strategy, you should determine whether prepaying expenses makes sense. This will depend on your tax rate this year and your rate in future years. Keep in mind future changes in tax laws that might raise your taxes. If your income increases substantially next year, you could be better off not prepaying expenses and instead maximizing your deductions for next year.
David Zubler is a tax accountant and Enrolled Agent in East Tennessee, providing tax strategies and representing clients before the IRS and has over 25 years of tax experience. He is the author of six tax books and has shared tax advice on national TV. He is the founder and president of Your Tax Care. The company provides business and tax education, including David’s one-minute tax tip radio recordings at YourTaxCare.com. David can be reached at (865) 363-3019 or contacted by email at email@example.com.