End-of-Year Tax Moves for Your Small Business

  •    A freelance reporter and writer based in Philadelphia, Pa., Dinah previously worked as a staff reporter for The Associated Press and Dow Jones Newswires.

As Dec. 31 approaches, moves that you make as a solopreneur or small business owner might work to your advantage when it comes to paying your 2016 income taxes. We checked with tax experts for a few ideas you may be able to use.

Several specialists, noting that the incoming Trump administration aims to lower taxes, suggest that business owners consider a timing strategy to delay income until 2017, when tax rates may be lower, while logging big expenses in 2016, when deductions may be higher.

Whatever tack you consider, remember that tax laws can be complex and your mileage may vary, so check with your own tax pro for which steps best apply in your particular situation.

Look For Potential Deductions

“For solopreneurs or mom-and-pop shops beginning to work on their taxes, consider all the possible deductions you can look into for your small business," says Deborah Sweeney, CEO of MyCorporation, which helps entrepreneurs start and maintain their small businesses.

"A few areas to watch out for include your home office expenses, for items that are used regularly and exclusively ... whether or not your office qualifies for a deduction; car use, for mileage racked up when running the business, like meeting clients or traveling for business; and smartphones and computers, with the deduction only available for the percentage of your device usage related to running your business," she says.

New York Certified Public Accountant Sallie Mullins Thompson agrees. "Pay as many bills, including credit cards, in 2016 as possible, even those that are not due until 2017, to incur maximum costs in 2016 when taxes will presumably be higher," she says.

Jacob Dayan, partner and co-founder of Community Tax, a Chicago tax resolution services company, says the usual strategy of accelerating expenses in the current year and delaying income to the next year "is more important than ever" now.

"President-elect Trump has stated a goal of reducing business taxes for pass-through entities like LLCs and S-Corporations to 15 percent. This is potentially a real gift to small business owners because it means that rather than paying your marginal rate on income received in 2016, you could pay only 15 percent on that same income if it is received in 2017," Dayan says.

"Therefore, you want to be extra certain you take advantage of any of the usual strategies for accelerating expenses and deferring income: prepay expenses or delay sending some invoices; buy a new SUV and take the heavy vehicle deduction," he explains.

Forbes recently reported that Trump proposes a 15 percent tax on all business income, so sole-proprietorship earnings reported on your individual tax return would be taxed at that rate if the plan becomes law. People with business earnings could see their tax rates drop from a top level of 39.6 percent to 15 percent, according to Forbes.

Business owners might invest in equipment in 2016 and make the IRS code section 179 election, deducting the full value in the current year — up to certain limits — rather than depreciating it over several years, experts say.

"Consider purchasing new computers, laptops, tablets, furniture and business equipment to reduce your taxable income," tax accountant Rashad Phillips says. If your business has a profit in 2016, he says, you might reduce taxable income by prepaying conference fees, 2017 business travel expenses, rent, utilities, insurance and office supplies.

"If you and your accountant are paying attention, you might end up reducing your liabilities materially for both 2016 and 2017," Community Tax's Dayan explains.

Delay Income

If you aim to lower taxes by trimming income for this year, and you're able to do it, you might delay some of those earnings. Phillips suggests a delay in sending December invoices until January, for example.

Attorney Robert W. Wood, however, cautions in a recent Forbes column that the IRS may tax delayed income if the recipient was entitled to receive the payment in the current year — under something called the "constructive receipt doctrine." Contractors who negotiate for deferred payments before providing services should be OK, though, he writes.

Contributing to a retirement plan, depending on the type of plan, is one way to defer income, thus lowering current taxes. Even if you set up an after-tax retirement plan that doesn't lower your current income and taxes, financial advisers tend to agree that it's never too early to start saving for retirement.

Thompson suggests that business owners start a retirement plan and contribute as much as possible by the applicable deadline. Options include different types of 401Ks and Individual Retirement Accounts, including SEP IRAs (Simplified Employee Pension) for sole-proprietors and other small business owners.

She notes that the IRS has posted a chart with information on the different types of small-business retirement plans.

Check on Moves, Get Books in Order

A knowledgeable tax professional should be able to work through various moves you might make to trim your tax bill.

CPA Randy Tarpey of Tyrone, Pa., says business owners might ask whether their current corporate structure is working to their best advantage. They also can look at how they're using their assets.

"The owners may be allowing the business to use real estate, and so the correct paying and reporting of rent income can make a big difference in the taxes due for the year if tax planning occurs," he says.

Before exploring tax-lowering strategies, make sure all your paperwork is in place. "The best advice I would like to offer to small businesses before year-end is to make sure they have all their bookkeeping up to date. This will allow them to determine if they have a profit or a loss. The business owner will then be able to determine if they can find ways to take advantage of tax savings before the end of the year," says Gina Riley, president of ClearView Accounting Solutions.

CPA and tax consultant Danielle Madden of Boulder, Colo., suggests that small business owners sign up for cloud-based bookkeeping services, and notes there are free or low-cost options for do-it-yourselfers. She also recommends setting aside a couple of chunks of time to update your books, and reviewing your calendar to remember where and when you incurred business expenses.

"The best tip I can give is to be on top of this on a monthly basis. Set aside time in your calendar to check in on your books each month. Not only will it save you time at the end of the year, it will also save you on taxes," says Madden. "Often times entrepreneurs miss out on expenses because they can't remember all their business expenses from months past off the top of their head. Or items, like business mileage, aren't properly or timely tracked so they go by the wayside. ... If you stay on top of it, you can pay estimated payments on time and avoid a big chunk of taxes plus penalties and interest come April."