This guest post was written by Josh Bauerle, Founder of CPA On Fire.
The end is near! Judgment is upon us!
OK, OK, it’s not the end of the world, but it is the end of 2013, and judgment of your success this year will soon be handed down in the form of a tax bill from the IRS.
While the most effective tax planning takes place early in the year, there are some last-minute tips you can follow to ease your pain come tax time.
Last Minute Savings
Because you are a faithful member of Fire Nation, I’m sure you all rocked your businesses in 2013, earning more income than ever before! But in the midst of your hard work and hustle you might have forgotten to plan for what will likely be your largest expense: taxes.
If this describes you, fear not! Here are five tips you can take action on in the next week or so to reduce your tax liability this year.
1. Fund Your Retirement
Retirement funding is an often overlooked area for Entrepreneurs.
Unlike employees, you probably don’t have a 401k at your disposal with the option of just having contributions taken directly out of your paycheck. If you haven’t done so already, it’s time to open and contribute to an IRA (Individual Retirement Account).
Maxing out your IRA is not only sound personal finance, it can also be a major tax deduction. In 2013, the IRS allows you to contribute up to $5,500 ($6,500 if age 50 or older), all of which is a dollar-for-dollar write off against your taxable income. And best of all, you can make these contributions through April 15, 2014 and still have them count for the 2013 tax year!
Did you really rock it 2013 and want a bigger tax deduction than the IRA limitations allow?
If your business has no employees other than your spouse, you should consider opening a solo-401k. These nifty retirement vehicles could allow you to put up to $51,000 into your retirement this year through various forms of contributions, matching contributions and profit sharing, all of which could reduce your tax liability.
Doing this could result in a tax savings of over $10,000!
2. Charitable Contributions
Have a little extra cash or property to give away this year? Why not reduce your tax liability at the same time?
By giving cash or property to charitable organizations before December 31st, you can reduce your taxable income while helping those in need. Just make sure the organization you are donating to is a qualified charity through the IRS.
You can check the IRS status of charitable organizations here and use this article for more information on maximizing your charitable contributions this year.
3. Defer Income and Accelerate Expenses
Most small businesses operate on the cash basis method of accounting. This means that income is recognized when it is actually received, and expenses are recognized when they are actually paid.
The cash method also offers businesses the opportunity to defer income and accelerate expenses at year-end, which can help decrease your tax liability.
Did you perform work in late December? Ask your client to wait until January to pay you.
Plan to make some purchases for your business in early January? Purchase them before year end instead.
By choosing to be paid later and make purchases earlier, you are able to decrease the amount of money the IRS recognizes as income for the 2013 tax year.
Sure, you could end up making more money in 2014, causing the deferred income to be taxed at a higher rate, but for most clients I recommend taking the tax savings while you can. For most people, next year is completely uncertain. If the opportunity is there to decrease your tax liability, your best bet is usually to take it.
4. Organize Your Tax Documents
I can’t even tell you the number of people who come to me on April 13th with a shoe box filled with receipts and want their tax return done by the deadline.
This hurts their pocket book in two ways:
First, without proper organization and little time to investigate, several deductions will probably be missed.
Second, I’m going to charge them a significantly higher rate for the time needed to organize their documents myself and the rush to get it done.
Don’t be the shoe box business owner. Take the time to organize your income and expenses by categories. You will usually find more deductions and your tax preparer will likely reward you with a lower bill.
5. Hire a Qualified Tax Preparer
I know, I know, tax prep isn’t cheap, and the low cost of doing it yourself through various online tools or software can be tempting. But do you really want the headache and responsibility of preparing something as complicated as taxes yourself?
IRS studies show the average business owner spends over 16 hours preparing their own taxes.
Not only that, they usually miss out on significant deductions they had no idea they were entitled to.
How much is your time worth?
How much is knowing your taxes are done right worth?
Not only will hiring a qualified tax preparer save you time, they will often save you more in tax liability than you pay them.
While I believe a CPA is usually the best way to go, there are other qualified tax preparers out there such as enrolled agents. Just be sure to avoid the “seasonal chain shop tax prep” whenever possible.
The Earlier the Better
As with most things in life, the earlier you set and implement a tax strategy, the better. The tax code is a complicated thing, and navigating it properly requires you to evaluate your business early and often. Make a vow next year to set a strategy from day one.
But in the meantime, following these five tips can help you make up for lost time and reduce the amount of your hard earned money that will be going to Uncle Sam this year!
*Note: You should consult a tax professional before implementing any tax advice. While these five tips will apply to most entrepreneurs, every situation is unique.
This post was written by Josh Bauerle. Josh is a CPA and the Founder of CPA On Fire, which specializes in providing tax and accounting services for small business owners.