With a new year just around the corner, many small business owners are looking for last-minute year-end tax maneuvers. While developing a sound tax strategy should begin with meeting with your accountant or tax-advisor, there are some basic moves you can make to help lower your tax bill.

If you plan on selling your business in the next few years, your tax strategy may be different. While nobody likes to pay more taxes, you may have to “invest in taxes” to keep the value of your business higher. Buyers and lenders typically look at the most recent 3-5 years in financial statements when determining value. Having stronger financial performance will help increase your asking price.

Purchasing New Equipment

If there are some equipment purchases you have been putting off, now is the time to make them. Increasing your expenses will help reduce your tax bill. If you already know that you plan on spending big money on the business at the beginning of the coming year, consider making those purchases now. Check with your tax accountant to see if you should take the full write-off now or depreciate it over time.

If you plan to sell your business in the next few years, you may want to reassess whether the new equipment is truly needed. Some equipment could actually help boost the value of the company, because it increases operational efficiency or productivity. It could also add value as an asset. If real estate is part of your business, capital improvements can also boost its value. For other equipment that is not necessary, you may want to defer the acquisition, or consider leasing it. Be sure to discuss any purchase with an accountant, or a business broker, in order to fully understand the short and long-term financial impact.

Deferring Income or Expenses

The larger your profits, the larger your tax bill. If you would like to reduce your earnings for the current year to offset taxes, consider waiting until January to send invoices and chase receivables. While this can reduce your taxes for the current year, it will increase your tax liability for the next year, so be sure to consider whether this makes sense for your situation or not.

Conversely, if you plan on selling your business soon, deferring income is not in your best interest. This is especially true if you want to sell in the coming year. In this case you may want to defer expenses until January instead of income, thereby increasing your profitability for the current year.

Prepare Estimated Taxes

Most business owners have a good idea as to whether or not they will end up owing taxes. If you are filing as a sole proprietor, partnership, S corporation shareholder, or self-employed individual and will owe $1,000 or more in income taxes this year, you should pay estimated taxes. You should also pay if you are filing as a corporation, and you expect to owe more than $500 in taxes.

Start assessing the previous year to reduce any surprises in January when fourth quarter estimated tax payments are due. You will want to pay the least amount required, based on your annual results, while avoiding penalties.

If profits have increased, you must pay at least 100% of the tax liability from the previous year to avoid penalties. If your adjusted gross income (AGI) from the previous year is over $150,000, that amount increases to 110%. If your profits decreased since last year, you may only have to pay 90% of your previous tax liability, but to do this, be sure that you have a clear understanding of what your total liability will be before you make this assumption and risk a penalty.

Charitable Donations

Contributing to a charity before the end of the year can help reduce your tax bill. If you choose to give to a local organization it can also boost your company’s image within the community. Your company’s reputation can positively or negatively affect its value, so your generosity could certainly help you when it’s time to sell.

Contribute to Your Retirement Plan

Maximizing your retirement contribution will help you to further reduce your taxable income. The deadline for 401(k) contributions is December 31. You have until April to make IRA contributions. If your business doesn’t have a 401(k) yet, you have until the end of the year to set one up. There is a tax credit available to small businesses with 100 or fewer employees who wish to start a new 401(k) plan. If you qualify, you can receive a deduction worth $5,000 per year for three years. You can also deduct any plan management expenses and matching contributions you make as business expenses.

These are just a few examples of year-end tax planning strategies. For better clarity, gather your financials and schedule a meeting with a tax accountant. If you’re planning to sell your company, be sure to disclose that information to your accountant, but also plan on discussing your situation with an M&A advisor such as a business broker. They can give you advice specific to exit planning and help you create a strategy around maximizing the value of your company and your potential profit from its eventual sale.

If you have specific questions about exit planning and the tax strategies around selling a business in Southwest Florida, contact us at Corporate Investment Business Brokers (CIBB). We begin advising many of our clients years in advance of their eventual business sale and can help you create a plan that will help boost the value of your business and make it more attractive to buyers.

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