Tax planning boils down to either accelerating or deferring income or deductions. In other words, do you want to report and pay taxes on more money or less this year and do you want more or fewer write-offs?
Your chosen strategy will depend on many factors, including:
- The previous year's earnings
- This year's earnings
- Next year's projected earnings (maybe a big project will start in first quarter?)
Take a look at last year's tax forms and this year's third quarter P & L statement to see what your financials say about your options. What do fixed and variable expenses look like? They will impact your decisions about deductions. What does net profit look like? That will impact whether you choose to accelerate or defer income.
To accelerate income, step up collections of outstanding receivables. Pick up the phone or send an email and ask clients to pay ASAP, or at least before December 31. Tell them it's a tax-planning matter (it sounds so much more dignified than telling clients that you plain old need the money!). If you've got a contract in the works, ask for a bigger retainer.
If you opt to defer income, perhaps because you've had a good year and you're not sure what the next will bring, then wait until January to collect receivables and ask for a smaller retainer fee. BTW, it's possible to defer up to 25% of your income through your self-funded retirement plan and it's tax-deductible.
If you need write-offs, scout for year-end deals on office furniture, computers, office supplies, software and whatever else you need to do business, including enrolling in a course or attending a conference. Big-ticket items can be written off in a lump sum or depreciated over a period of years (which is in reality deferring the deduction, since it's being spread out).
If you elect for fewer write-offs, hold off on shopping until the calendar turns. Alternatively, if you are presented with office or business equipment deals that you cannot refuse, then choose the depreciation method and spread out your deductions.
Speaking of deductions, remember your retirement plan. Solo 401K, SIMPLE IRA and SEP IRA are funded with pre-tax dollars and are tax-deductible up to $52,000.00 (check the current tax laws for update). If you're 50 years old +, the catch-up contribution feature raises the maximum. Remember the tax- deductible income deferral feature if this has been a very good year, but you suspect that the next will be less so.
Further, you might want to make an appointment with your accountant or business attorney and confirm that you are enrolled in the best legal entity for your circumstances. Your exit strategy can impact the legal entity that you use. For example, if you want to take on a partner and eventually sell out, or pass the business to offspring, niece or nephew, a different legal entity may be preferable.