Tax Planning For Next Year
In an iconic Calvin and Hobbs comic strip, Hobbs is reminding 6-year-old Calvin that his leaf project for school will soon be due. “You haven’t even started.”
“I work better under pressure,” Calvin responds.
“You only work under pressure,” Hobbs grumbles.
When it comes to taxes, many of us can relate to Calvin. The forms, the hassles, the annoying number crunching and obscure rules can make it a nuisance we’d rather not deal with. On top of that, you need to plan for the future as well as deal with the present, which means not only filing this year’s taxes, but gearing up for next year’s as well.
The good news is that tax planning for future years can not only keep you keep you from receiving a ‘belated valentine’ from the IRS, but can save you quite a bit of money. Here are some tax issues to consider:
Depreciation. If you’re familiar with the tax code, you know you can deduct the cost of equipment you purchase for your business. You can even deduct it all in one year if you want to through the Section 179 deduction. You may not want to, though. Using regular straight line depreciation lets you deduction a certain steady percentage of the cost of the item over its useful life. If you’re expecting your business to really take off next year, you may want to forgo taking all the expense this year.
Deferring Taxable Income. You’re taxed on the profit your business makes, not its gross sales. With some creative end-of-the-year juggling, you can adjust your expenses to create a greater or lesser profit in a given year. For example, if you’re thinking of purchasing a big ticket item, you can pay with a check and mail it a few days before the end of the year. The tax rules say you can deduct the expenses based on the day the check is mailed, not when the check is cashed, so you can control which tax year your expense falls under.
Prepaying Expenses. You can deduct these costs as long as the benefit from the prepayment doesn’t extend longer than the end of the next tax year. Using this strategy you could prepay your office rent or insurance for the next year and reduce your taxable income this year.
Net Operating Loss. Despite your best hopes, not every year will be a profitable one. If you experienced a bad year, you can increase your cash flow by carrying your loss, Net Operating Loss or NOL, back up to two years to recapture some of the taxes you paid in better years. Or if you think your business will rebound strongly in the next year, you can carry the NOL forward up to twenty years.
Next year is next year until it’s staring you in the face. With proper planning now, you can be ready for it. And while it’s not what Calvin would do, it can make your leaf project (or your taxes) go much more smoothly. (No, we are not accountants, so we recommend you consult yours about any questions.)