Here’s a great tip for small business owners who use cash basis of accounting – especially those who operate as a sole proprietorship, partnership, limited liability company or S corporation and report their share of business income on Form 1040, taxed at the personal and not corporate income tax rate.
The individual federal income tax rates are scheduled to be close to the same next year as this year. The actual tax brackets were adjusted only about a half of one percent.
So an option you have is deferring revenue into 2016 while accelerating deductible expenses into 2015 if you expect to be in the same or a lower tax bracket next year. This option will postpone part of your tax bill from this year to next.
But if business is booming, and you’re likely to be in a higher tax bracket in 2016 (say increasing from 28% to 35%) consider taking the opposite strategy. You could accelerate revenue into 2015 and postpone deductible expenses until 2016. Then more income will be taxed at your lower 2015 marginal tax rate instead of an anticipated higher rate in 2016.
So if you expect your company to be in the same or a lower bracket in 2016, postpone revenue into 2016 while accelerating deductible expenses for 2015. If you expect to be in a higher tax bracket next year, accelerate taxable income into 2015 and defer deductible expenses to 2016.
There are certain advantages in tax planning when the cash method of accounting is used: for instance, payment of business expenses may be accelerated before year end, in order to maximize tax deductions, whereas billings for services may be postponed to after year end, so that payments won't be received until the new year, thus postponing tax payments on such income. Because of these advantages and the manipulations that can occur with it in order to minimize taxable income, the IRS has set limits on the cash basis of accounting for tax purposes.
Every business is unique and has particular tax considerations. Please contact our office so that we can set a time to discuss your business in more detail.
Check out our prior year end tax tips, and look for more in the coming days and weeks. Check back here regularly for more tips - or call us for custom advice for your business or personal tax returns.
