Tax Tips for Small Businesses

December is just around the corner, so if you pay your taxes based on the calendar year, now’s the time to take a look at your income and expenses. Depending on your 2016 profits and your earnings projections for next year, you may want to make some adjustments before year-end.

Cash vs. Accrual Accounting

The type of accounting method you use may dictate your end-of-year tax strategy. Businesses use either cash or accrual accounting. With cash accounting, your income and expenses are not counted until actually paid. So, if you send someone an invoice in December and they don’t pay it until January, you wouldn’t claim that income on your 2016 tax return. Accrual accounting records transactions immediately – that December invoice would be considered part of your 2016 income, even before you receive payment.

If you use accrual accounting and want to reduce your taxable income for 2016, you may be able to do that by delaying invoices until the new year. However, make sure you get professional accounting advice if you’re planning to delay income, so you don’t inadvertently violate tax law. For example, it’s perfectly legal to delay invoicing someone, but if you receive a check in December, you can’t hold it until January to avoid claiming it as income. The Internal Revenue Service states that you must claim all income as it’s made available to you. So if someone informs you in 2016 that a payment is available to you, that counts as 2016 income, regardless of when you receive it.

Reducing Tax Liability

Tax deductions can help lower your overall tax liability. For example, the costs of professional licenses or memberships in trade organizations are deductible expenses. If any of your licenses or memberships will expire in 2017, renewing them this year might lower your tax liability for 2016.

Any funds you deposit into a Health Savings Account are not counted as income, so before the end of the year, make sure you’ve deposited the maximum allowable amount – $3,350 for individuals, or $6,750 for family plans.

Accelerated Depreciation

If you’ve bought new equipment, computer software, or a building in 2016, take advantage of accelerated depreciation when you file your 2016 tax return. The IRS allows business owners a bonus depreciation deduction of 50 percent on purchases totaling less than $500,000, and accelerated depreciation through 2019.

You can choose to claim accelerated depreciation in two ways:

  • Double declining method – This method doubles depreciation, so you would be able to claim the total depreciation value in half the time. For example, office furniture has a “useful life” of seven years. With the double declining method, you would be entitled to deduct the total expense for a new reception desk over 3.5 years.
  • Sum-of-the-years-digits method – As explained on the financial advice website Balance.com, this depreciation method adds the digits that equal an asset’s useful life. An asset with a useful life of five years has five digits: 1, 2, 3, 4, and 5. Adding those digits together produces the number 15, and depreciation is claimed over five years, beginning with 5/15 the first year, 4/15 the second year, ending in year five with the final deduction of 1/15.

Forecasting and Planning

Many of the decisions you make about your taxes should be based on your future plans. With the help of an accountant and attorney, you’ll be better able to forecast and plan, which will help you make the best decisions possible.

Lusk Law, LLC, specializes in assisting business owners as they plan for the future. Our experienced attorneys have provided legal counsel and representation to entrepreneurs in Frederick County, Howard County, Baltimore County, Baltimore City, Carroll County, Washington County, and Anne Arundel County, and other counties in Maryland. If you have questions about financial planning and taxes – or any other business-related topic – please call us at 443-535-9715 or fill out our contact form.

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