I have been approached by quite a few of my regular income tax clients this past month (and some new ones) and most have the same question: What do we need to do to ensure lower taxes and have everything ready for preparation on time? I have the following suggestions for them and want to pass them on to everyone on the internets.
1. Ensure you are keeping proper records. This applies not only to keeping receipts, but also to your financial records for any business you may have. With one client, I did a short review of his company books and found negative accounts in inventory. His book-keeping system was improperly crediting inventory when ordered, but there was no corresponding debit when delivered. Since we started looking early enough, we were able to address the problem rather than being rushed in tax season or having to file an extension.
2. The general rule is that you want to accelerate expenses and defer income, but this may not hold for this year to next year. Generally, because of the time value of money ($1 today will buy more than $1 in one year) you want to report as little in income as possible, while staying within the law. However, we have two factors working against this strategy right now: tax rates are scheduled for a grand increase next year and rates of return are so low that a dollar saved won’t make too much difference anyway.
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3. Now is the time to purchase equipment or machinery you need. I mentioned this in a previous article that the Section 179 expense deduction is going to seriously curtailed next year. This year you can make qualified purchases up to $125,000 and immediately deduct the cost. Next year, the limit is $25,000 and decreases dollar for dollar on any purchase over the $25,000. As an example, if you needed to purchase a $100,000 tractor and your effective tax rate was 30%, if bought this year, you would save $30,000 in taxes, but next year, you would only get regular depreciation which equals about only $4,200 in tax savings.
As with estate planning, tax planning is much better accomplished the sooner you start. If you have questions or if you need a tax preparer for next year, please do not hesitate to contact my office.