Timing is Everything

In general, it’s beneficial for most businesses to 1) include all allowable expenses in the current year, and 2) defer income if possible. That way, your 2017 tax liability will be as efficient as legally allowed.

The new tax reform law (commonly referred to as the Tax Cuts and Jobs Act) makes this strategy even more valuable this year. Beginning in 2018, the new law will replace the corporate tax structure having a top rate of 35% with a new flat rate of 21% as well as a number of changes to Partnerships, LLC’s, and S corporations. . So, the more expenses you can deduct and the less revenue you incur today, the less taxable income that will be subject to today’s higher tax rates.

Of course, every company’s situation is unique. If you expect to be in a higher tax bracket in 2018 than in 2017, you might do the opposite. This can be the case for a business with rapidly growing profits or one that expects many of its tax benefits to be eliminated or even limited under the new tax law.

Practical Applications

Let’s assume that your company follows the conventional wisdom. That is, you want to minimize revenue and maximize expenses. Then consider these ideas:

• If you use the cash method of reporting for tax purposes, defer billing customers late in the year. As a result, you’ll be paid in 2018, not 2017. (And the new tax law expands the size of businesses that qualify for the cash method of accounting starting in 2018.)
  • You can pay performance bonuses this year, rather than in January, because wages are generally deductible in the year they’re paid. Do the same with unused vacation time.
  • Be sure all your bills are paid by December 31 to get the deduction on the books.
• If you use the accrual method of accounting for tax purposes, you may defer delivery of products or postpone completion of a last-minute job until 2018 (as long as it won’t upset your customers).
  • You can accrue bonuses and unused vacation time in 2017, rather than next year, because accrued wages are generally deductible if paid by March 15 of the following year.
  • Be sure all your accrued expenses are up to date and complete.
• Be sure to check inventory for old, broken, and non-saleable items. Get them off the shelf and off the inventory count.
• If you’ve been promising to entertain a customer or business associate, try to do it before year end. Under current law, you can deduct 50% of the cost of entertainment directly related to or associated with the active conduct of a business. But, under the new law, there’s no deduction for entertainment expenses for amounts paid or incurred after December 31, 2017.

Note that you can deduct expenses charged on your credit card in 2017 on your 2017 tax return even though you don’t pay the charges until 2018.

Let’s Talk

The rules for property deducting expenses and recognizing income for tax purposes are complicated. Our tax professionals can help you take advantage of last-minute tax planning in light of the current and new tax rules. Give us a call to discuss your specific situation and whether these tips might benefit you.