As the end of the year approaches, it’s time for a tax season talk. We’re diving into the top 5 year-end tax deductions that could save your tax bill and a few pitfalls you want to sidestep.
Before we get to the fun stuff, my attorneys require me to give you the usual disclaimer: This information is provided for general informational purposes only and should not be construed as accounting, tax, or professional advice. You should consult your tax or financial advisor for relevant advice. 4 Corners CFO and its representatives are not responsible for errors, omissions, or results from using this information.
Now, let’s get to those tax tips!
Top 5 Year-End Deductions
Strategic Prepayments: The Power Move That Pays Off
Imagine if you could make money disappear – legally! Prepaying expenses before midnight on December 31st is a smart deduction move for all of you cash basis taxpayers. Beware, not all prepayments are created equal. They must strategically make those prepayments work for you, not against you. When you prepay an expense this year, you are removing that expense from your deductions next year. You might want to skip the prepayment if you expect to make even more money next year and are already at a tolerable tax threshold in the current year or can take advantage of some of the deductions listed below. Choose the best year to use the expense.
Asset Upgrades: Upgrade Smart, Deduct Smarter
Upgrading your business tools can be exhilarating, but before you whip out the credit card, let’s discuss the tax perks. You can turn your wish list into deductions that keep you technologically advanced and save you money when Uncle Sam comes knocking. Remember that the more expensive an asset is, the more likely it will have to get deducted over time and not all at once this year. Check-in with your tax CPA/EA before any big purchases. As your favorite CFO, I also want to remind you to get a return on that investment. Do not buy something that doesn’t return time, money, or both to your business to save on taxes!
Charitable Contributions: Give Back, Get Back More
‘Tis the season of generosity, and your business can be part of the giving spirit. Charitable contributions warm hearts and can cool down your tax bill. Let’s make sure your goodwill doesn’t lead to financial woes. First, you must have the cash available to make this happen. If you’re looking for deductions, we will assume it’s because you had a great year, and cash flow is not a problem. Second, ensure this provides a return on investment or is your passion. Remember, you will only receive 20-30% of that contribution as a reduction in your tax bill. You want to avoid paying $10,000 to save $3,000. That is not a good investment with any of these deductions. Charitable contributions can be great investments when you contribute to a worthy cause and increase visibility and credibility in your community. They can also make you feel good. If you are passionate about a project and can afford to give, give. In that case, the tax savings are just an added perk and not the reason for the expense.
Employee Bonuses: ‘Tis the Season for Smart Rewards
Let’s unwrap the secrets of strategic bonus planning so you can keep your team happy without a year-end budget meltdown. I will sound like a broken record, but it’s all about investment. Bonuses should not be something you give equally and consistently every year. They are a perk and an act of appreciation for productivity and performance. Rewarding productivity and performance, which should show in your profit at the end of the year, is a significant investment.
What if it hasn’t been a great year? If you’ve got a fantastic team but didn’t have an amazing year and you can still afford to show some appreciation, I highly recommend doing it. Keeping your employees happy and motivated is one of the best investments you can make in your business.
Retirement Contributions: Invest Today, Prosper Tomorrow
Are you thinking about retirement amidst the holiday hustle? It’s a brilliant move. Spoiler alert: it’s a gift to your future self and a clever way to trim your tax bill. This should be the first deduction you turn to and max out. We’ve talked about return on investment with every other deduction, and this is the ONE situation where you are creating wealth and saving on taxes. There is no downside to this deduction, but there are limitations. You have to have the cash to contribute. You are also limited to specific amounts based on the retirement plan and payroll amounts.
Why Tax Season Planning Beats Year-End Panic
As the curtains close on the year, here’s the golden nugget: planning beats panic. We aim for all of our readers and clients to be profitable, which means you’ll pay taxes. Plan for it, set it aside, and don’t be surprised. By staying on top of your finances throughout the year, you can sidestep the year-end stress and avoid a cash flow crunch when tax season arrives.
With a dash of strategy and a sprinkle of know-how, you’ll conquer year-end deductions and emerge as the hero of your business finances. Here’s to a stress-free tax season and a financially fabulous year ahead! If you need support sorting out your numbers prior to tax season, get in touch! We would love to help.