Most small businesses are allowed to use cash-method accounting for tax purposes. If your business is eligible, cash-method management can help you tweak your 2017 and 2018 taxable income to minimize taxes over the two-year period.
Here’s what you can do if you expect business income to be taxed at the same or lower rates next year, taking into account the possibility of tax reform.
Cash-basis taxpayers generally aren’t required to report income until the year that cash or checks are physically received in hand or through the mail. So, an easy way to reduce taxable income is to postpone some year-end invoicing for a few days (or weeks). That way, customers won’t remit payment until 2018 — and the income won’t hit your tax return until 2018. Of course, you should never postpone invoicing if it will compromise your ability to collect payments from customers.
Likewise, cash-basis taxpayers generally can deduct expenses in the year they’re paid. So, consider charging recurring expenses that you would otherwise incur in 2018 before year end. Doing so allows you to claim 2017 deductions even though the credit card bills won’t be paid until next year.
However, this favorable treatment doesn’t apply to store revolving charge accounts. For example, you can’t deduct business expenses charged to your Home Depot account until you pay the bill.
Another way to accelerate expenses is to pay them with checks and mail them on December 29 or 30. (December 31, 2017, is a Sunday, so there won’t be any mail delivery.) The tax rules say you can deduct the expenses in the year you mail the checks, even though they won’t be cashed or deposited until early next year. For big-ticket expenses, send checks via registered or certified mail. That way, you can prove they were mailed this year.
Some businesses opt to prepay expenses for next year. You may be eligible to deduct these prepayments, as long as the economic benefit doesn’t extend beyond the earlier of:
- 12 months after the first date on which your business realizes the benefit, or
- The end of the tax year following the year in which the payment is made (in this case, 2018)
For example, this rule allows you to claim 2017 deductions for prepaying the first three months of next year’s office rent or prepaying the premium for property insurance coverage for the first half of next year.
Using the Opposite Approach
If you expect to pay a significantly higher tax rate on next year’s business income, try to do the opposite of these things to raise this year’s taxable income and lower next year’s. Factor your tax reform expectations into the equation here.
For more information about tax strategies for small businesses, contact us today!