When
you read this our long national nightmare....the presidential
election... will be nearly or finally over. Depending on whoever wins
the newly elected or re-elected president will have a very full plate.
Especially in our imaginary tax world. As you are probably aware
December 31, 2012 is the date many tax cuts and deductions are scheduled
to expire. Some call it Taxmageddon. Federal Reserve Chairman Bernanke
labeled it the financial cliff. I just published on our blog a long
discussion about what is happening. Unless Congress and our president
do something. Just something. It is worth taking a look at.
Meanwhile
time to get back to business. With October 15 behind us and April 15
still comfortably far away, it’s a good time to start boning up on ways
to save money since things are starting to get serious. The end of the
year is less than two months away.
Version 31 of the same story.
Sally Smith, was a smart businessperson, she knew the basics of year-end tax planning.
1. Postpone income to next year.
2. Pay as many expenses as possible this year.
3. Keep inventory level low.
4. If you are going to make a capital investment, do so before the end of the year.
5. Double check for missing deductions.
6. Invest in an IRA for similar type account.
Sally
owns a retail store and faced the year end with her eyes wide open.
Sally knew that a few strategies would pay big dividends on April 15.
Here is what she did to reduce her tax liability:
Since
Sally was operating her business on a cash basis and relied upon cash
sales through her cash register, she did not have the opportunity to
postpone much income. She has established a policy for many years to
close her books on December 28, which gave her opportunity to defer
three days of sales to next year.
Sally
then reviewed her bills. She started to write out checks for her
expenses. She wrote checks for all expenses due, even if some expenses
were due in January. She dated her checks for December 28, 2012 to be
sure that the expenses were recorded for this year on December's
bookkeeping. Her checks written totaled to almost $10,000. Her one
simple strategy, accelerating expenses meant that Sally saved over
$4,000.00 in income tax this year.
Since
you pay tax on your inventory at the end of the year, Sally knew that
reducing her inventory to the lowest amount possible was important for
her. First, she decided to review her inventory to see if she had things
that have been gathering dust. She found items that in fact had been
sitting around for more than three years. She decided to mark those
items down and immediately started an inventory reduction sale for those
items. She knew that the value of her inventory was based upon her
costs of the items, not the selling price. She also knew that items
that were partially used or supplies not for resale did not count as
part of her inventory.
Sally
had been debating whether to purchase a new computer for her business.
The local computer store was offering a "six-months same as cash"
financing offer for the purchase of new computers. Sally decided to
purchase the computer now, electing to take advantage of the special
financing offer. She knew that she could deduct the full purchase price
of the computer on her tax return, even though she did not pay for it
right away. When you purchase something using a credit card or borrow
the money, as Sally did, you get to deduct the amount when you purchase
the item. The $3,000 computer saved Sally $1,200 in income tax.
As
part of her year-end review Sally took a minute to see if perhaps she
has recorded all her business expenses as part of her monthly record
keeping. She knew that the credit card that she had been using
exclusively for business had some interest payments that were not
included. She made a note to record her year-end statement from her
credit card company to make sure that it was included as interest paid
on her year-end documents to her accountant. In addition, she decided
to review her automobile mileage and other receipts for expenses that
she might not have had for her business and had a chance to record in
her monthly record keeping.
Surprisingly
Sally read last month’s newsletter to all corporate clients and decided
to go online. She took our advice and subscribed to Wave accounting.
She took advantage of downloading her bank account and discovered how
easy it was to enter her data. She really liked it and is recommending
it to other small business owners she knows.
Sally
also knew that she had time to make her annual IRA contribution until
April 15 of next year. She decided not to make it till next April. She
also made a note to talk to us about Roth IRA accounts and analyze the
different options available to her. One of her options was a
self-employed Pension Plan commonly called a SEP. IRA's. SEP. IRA's do
not have to be opened or funded until the due date of your return. That
means that Sally doesn't have to open or make a contribution to a SEP.
IRA for the 2011 tax year until April 15, 2013. She can also contribute
a larger amount to her SEP. IRA than she could to her regular IRA.
However, she was reluctant to open one because she also knew that she
would have to contribute an amount to her full time employees. She made
a note to ask her accountant what that contribution would be and what
her resultant tax savings would equal. She also thought her accountant
might have ideas on how to "cushion" the employee's contribution issue.
Sally
knew that her year end review of her tax situation saved her almost
$7,000 this year. She made a note to review her year end information
before we prepared her tax return in 2013.
SAVE TAXES...REMEMBER BEFORE JANUARY 1, 2013
1) Postpone income to next year.
2)
Pay as many expenses as possible this year, even if you do not send the
checks off till January, be sure to write the checks for the expenses.
3) Keep inventory at a low level.
4) If you are going to make a capital investment, do so before the end of the year.
5) Double check for missing deductions.
6) Invest in an IRA or similar type account.
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