Year End Tax Moves to Reduce Business Profits

Here are some tax planning strategies to help you reduce profits for the year and thus reduce the taxes you will pay you. (Keep in mind if you want to accelerate profit into this year do the opposite of the strategies listed below)

Delay Revenue

If your business is an accrual basis tax reporting business delay sending out invoices until next year. For a cash basis tax reporting business delay receipt of income. You may need to call people you have already invoiced to request that they make sure you don't receive their payment before the year end. In reality they can send you a payment before year end and you could receive it after year end so this could benefit both you and your clients/customers.

Accelerate Expenses

On the Expense side for an accrual basis tax reporting business make sure you enter all the bills you receive before year-end and make sure they are dated this year. For a cash basis tax reporting business pay as many bills by year-end as possible. If cash is tight mail out checks the last day of the year giving yourself a few days into January to cover the checks. Even better put as much as you can on a business credit card and even though you won't pay the bill until later a cash basis tax reporting business can deduct the expense the date it is charged (assuming it is a legitimate business expense). Charging expenses on a business credit card before year end also works for an accrual basis tax reporting business.

Acquire and Put in Service Capital Assets that Can Be Section 179 Deductions

Any Capital Assets that you acquire and put in service before year can likely (assuming the right conditions) be fully deducted as a Section 179 depreciation deduction this year. Be careful when it comes to list assets that are the type you use in your daily non business life. With these listed assets you will only be able to deduct the percentage of the cost that is attributed to business use versus personal use. 

There may be other strategies too depending on the type of business and situation you have. Keep in mind that these strategies are in reality a shifting of profits and taxes between years. Employing profit reduction strategies for this year will typically mean increasing profits in future years, so plan accordingly. Even though you are shifting profits between years you can delay taxes and perhaps lower taxes depending on the circumstances for you in the different years involved. 

As mentioned above you can also move profit into this year especially if it looks like your income next year could move you into a higher tax bracket or trigger the Alternative Minimum Income TaxThe Additional Medicare Tax and or the Net Investment Income Tax

These tax strategies can be complex and I would be happy discuss your situation with you and become your CPA and work with you on an ongoing basis.  Feel free to contact me using my information below.

Jeff Haywood, CPA
The CPA Superhero

The above information is general information and is not all inclusive and as always in your tax situation everything "depends on facts and circumstances." So call me to talk about your specific facts and circumstances.

Why January 15th Is An Important Date for Your U.S. Taxes

Nobody likes to pay taxes and penalties on taxes are even worse. On your personal form 1040 for your U.S. Taxes you must not only pay enough tax but you must also pay it in a timely manner or pay a penalty. The date you must pay enough tax in to the IRS to avoid an underpayment penalty is typically January 15th. Below is a quote from IRS publication 505 on the subject:

If you did not pay enough tax, either through withholding or by making timely estimated tax payments, you will have underpaid your estimated tax and may have to pay a penalty.

So what is the rule for the Underpayment Penalty (not to be confused with the Late Payment Penalty :~/  ) Below is the General Rule from IRS publication 505 for 2014 taxes:
General Rule

Did you catch it. They don't put it in bold print or shine a bright light on it, but the key is timely estimated tax payments. Basically this means you must pay in enough tax with your payment for the January 15th deadline for the fourth quarter estimated tax payment. That is why the January 15th is such an important date for your U.S. taxes.

So first, how exactly do you avoid paying the penalty. As noted above you avoid paying the penalty if you pay in by January 15th of the following year at least 90% of your current year tax or 100% of your prior year tax. (Of course) Except if you are a high income taxpayer then you pay (play) by a different set of rules. From IRS publication 505 here is the rule high income taxpayers pay (play) by:

So for high income taxpayers you must pay in at least 90% of your current year tax or 110% of your prior year tax. Also, note for farmers or fishermen there are also special rules to pay (play) by.

Second, are there any exceptions?  Here are the exceptions as found in IRS publication 505:

Third, what is the penalty amount?  The short answer is "it is complicated" as you need to file form 2210 to calculate the penalty and there are a few different ways to calculate the penalty. But to give you an idea, if you can use the short form your underpayment amount for the year (on the form for 2014) is multiplied by .01995 and then if paid it all by April 15th you get a discount of .00008 times the number of days it was paid before April 15th.

The bottom line is it is best to pay the required amount by January 15th. I have heard but I have not found it in writing yet that the IRS is increasing penalty amounts for 2016. I don't remember where I heard it and it may have been the shared individual responsibility payment or I may have just had it in a dream, but know that the U.S. government needs money and they will continue to find ways to generate more income (obviously without calling it income taxes so they can say they have not raised income taxes). So just count on the penalties to be increased in the near future.

Keep in mind the U.S. government wants you to pay your taxes quarterly over the course of the year. So it is also possible you will owe this penalty if you don't make quarterly payments throughout the year.
Finally, if hit with this penalty, can you get a waiver. Yes. According to publication 505 here is the scoop:

So as mentioned above you possible face penalties for underpaying your taxes by the due dates, and then there are also late payment penalties and interest and other assorted goodies (not specifically mentioned in IRS publication 505).

If you do not pay your taxes by the tax deadline, you normally will face a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes. That penalty applies for each month or part of a month after the due date and starts accruing the day after the tax-filing due date. This is difficult enough for those that do this for a living and you may want to find a little peace of mind by paying me to help with all this (growing) mess.   

The CPA Superhero would be happy to help you on an ongoing basis. I also help clients with reviewing and analyzing business results, plan for retirement and other financial goals in addition to all the various events that come up in the course of doing business. The underpayment penalty really requires an ongoing discussion during the year to determine how much to pay in estimated quarterly tax payments. As with other things the more you make the bigger concern this is for you. Please feel free to call me for help at my number listed below or send me an email at my address also listed below.

Jeff Haywood, CPA
The CPA Superhero

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My posts contain general information that does not fit every situation, they are not all inclusive, and as always for your tax situation everything "depends on facts and circumstances."  In addition, the information/IRS requirements are always subject to change.  So call me to talk about your specific facts and circumstances and what you want to accomplish.

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