By Jacob Stewart, Tax Strategist at TOP CFOS
As the end of the year approaches, you can save yourself a lot of money and pain come tax-time by planning ahead. You can usually contribute to HSAs and retirement accounts as late as April 15th of the following year (as either an individual or as a business owner). Even though this is the case, most businesses must take and pay for their deductions by December 31st in order to count for the current tax year. Creating a tax projection and plan can save you thousands of dollars in taxes. Here are some examples of things to consider:
1) Business expense reimbursements:
Your business can reimburse you for many different out-of-pocket expenses that you incur throughout the course of the year. If these expenses are not reimbursed by December 31st, your deduction for them could be limited or reduced. This reduction will be by the 2% exclusion on your personal tax return and/or by the alternative minimum tax. Reimbursable expenses might include home office expenses, office equipment purchases, business and licensing fees, mileage, travel, etc. Make sure your business has an accountable plan in place so that reimbursements are allowable and properly documented according to IRS guidelines.
2) Home rental deduction:
The tax code allows you to rent out your home for up to 14 days per year tax-free. If you are a business owner who uses the non-office part of your home for meetings or other business-related events throughout the year, you need to be sure to properly document those events. You will have to pay the proper rental amount to you by December 31st.
3) Equipment and other large purchases:
If you need to purchase a new business vehicle or other large piece of equipment, now might be the time to do it, or it might be better to wait until next year. Strategic planning is essential in order to maximize your deduction.
4) Income shifting and charitable donations:
If you plan on shifting income to your children or other family members (rather than gifting it), you need to be sure to do so by the end of the year. There are multiple regulations related to income shifting. Strategic planning can make a very big difference in the amount you save (and it can keep you out of trouble with the IRS). The same applies to any charitable donations you can make before the end of the year. This includes food, clothing, furniture or other non-money donations.
5) Other deductions:
If you have been thinking about setting up a business entity or an employee benefit plan, the window is quickly closing for this year. A tax strategist can discuss the pros and cons of your plan and work with your other advisers to implement the plan in time to reap some of the rewards this year.
There are hundreds, maybe thousands of deductions available if you know where to find them and how to properly use them. Good planning also takes time. If you wait until December, several options may no longer be available for 2016. If you decide not to think about taxes until after the first of the year, you will miss out on thousands of dollars of savings.