5 Tax Planning Tips You Need To Know Before Year End
If you're interested in potentially saving some money on your tax returns, this post is for you. As an accountant, one of the most helpless feelings I have is when a potential client reaches out to me after the year is over. At that point, many of the tax-saving ideas and strategies we like to suggest can no longer be implemented. I think it's imperative for taxpayers to appreciate the gravity of the year-end and the great benefits of being proactive. That's what this post is about: I hope to give ideas you can actually implement before December 31st, rather than being a tad too late. Today, we're going to discuss five potential tax-saving tips. The first three tips will be for business owners (yes, even if you are paid via a 1099-NEC to your personal name and file your "business" as part of your personal tax return - Schedule C.), while the last two tips will be for everyone. So, let's get into it!
1. Deferring Income
Most small business owners file their tax returns using the "cash" basis. (If you're unsure if you do, check your tax returns or ask your tax preparer.) Under the cash basis, income is usually taxed in the year you receive it. If you do not collect payment from your customers until 2024, that income will not be included in your 2023 income. Yes, delaying the receipt of a customer's payment by one day (from 12/31/23 to 1/1/24) can defer that income to next year.
2. Accelerating Expenses
Assuming your business operates using the "cash" basis, spending money on business expenses in 2023 (rather than waiting to pay them until 2024) will help reduce your company's 2023 income. So, if you have the cash flow for it, pay any outstanding bills your business may have, rather than paying them in January 2024.
3. Depreciation Expense (Including Section 179 and Bonus)
If your business is profitable and you're concerned about the potential tax implications, you MAY be able to write-off/expense most of the purchase of a car, truck or equipment that is purchased for your business. Here is how it works: Typically, when your business makes a large purchase, you will need to capitalize that purchase, which means you will only get to expense the purchase price ("depreciation") over a number of years. Not so good. But IRS Section 179 allows companies to write-off a significant portion of the purchase price of qualifying equipment/vehicles in the year of purchase. There is also something known as "Bonus" Depreciation that can often be claimed in addition to Section 179. Here is one of the best parts: It's a phantom expense; even if you don't actually pay for the entire expense in 2023 (i.e., you finance it over a number of years), you may still be able to use Section 179, and Bonus Depreciation since the asset is owned by your business. Imagine gaining a valuable expense for your business (saving tax money), without having to actually fork over all of the money in the current year for the expense! There are a number of rules regarding this topic (including which items qualify and for how much money) and the IRS has made some new limitations for Section 179 for 2023, so it's best if you consult with your tax professional before doing anything. If used correctly, though, this could be a game-changer for the tax bill of many businesses for 2023.
4. Tax-Loss Harvesting
This is strategically selling investments to help offset income. Say you have an investment that is underperforming and losing money. If you're fairly confident this investment will not rebound, it may make sense for you to sell it before the end of 2023. This sale for a loss may be helpful in two ways:
A) It will allow you to offset investment income (gain). If, for example, you sold stock A in 2023 for a gain, selling stock B for a loss can help reduce that gain (and your tax bill).
B) Any remaining loss can offset $3,000 (if married, filing jointly) of ordinary income (e.g., W-2). Any leftover losses can then be carried forward to future years.
Basically, tax loss harvesting allows you to have a tangible benefit from selling an investment that you and I know is at the point of no return.
We previously covered this in greater detail in a previous Friday blog post, but it's worth repeating here to stress the potential year-end benefit. There are two kinds of tax-filers, those that "itemize," and those that take the "standard" deduction. If you will itemize your deductions for 2023, donating to charity before the year-end can help reduce your taxable income for the year. I encourage you to check out that previous blog post, as it contains many important details.
Now is a great time to prepare for the year-end. While I hope you found these five tax tips to be helpful, I strongly encourage you to not draw any conclusions from this post. You can use these ideas as a springboard to discuss with your tax professional to better understand how to minimize your tax liability for 2023. Happy savings!
A. Shleifstein & Co. CPAs is a full-service accounting firm, offering white-glove service. You've worked hard building your business. You continue doing your thing, while we handle all of your tax filings and help limit your tax liabilities.