If you go by cash for accounting purposes, juggling year-end revenue and expenses is pretty easy. The cash method allows you the flexibility to manage your 2015 and 2016 taxable income to minimize taxes over a two-year period.
Here are some cash method strategies to weigh if you expect business income to be taxed at the same or lower rate next year:
- Before the end of the year, use credit cards to pay any recurring expenses you would otherwise pay in early 2016. You can deduct that money this year even though the credit card bills won't be paid until 2016. However, you probably can’t use this option for revolving charge accounts issued by retailers – you can't generally deduct business expenses charged to your company account until you pay the bill.
- Another option is to pay expenses with checks and mail them a few days before Dec. 31. Tax rules say cash-basis entities can deduct the expenses in the year checks are mailed, even if they won't be cashed or deposited until the next year. For significant expenses, send checks through registered or certified mail to prove they were mailed in 2015.
- The U.S. tax code also allows you to prepay some expenses for the next year, as long as the economic benefit from the prepayment doesn't extend beyond the end of 2016 (the tax year following the year in which the payment is made). For example, you can prepay the premium for property insurance coverage for the first half of next year.
- Regarding revenue, the standard rule is cash-basis taxpayers don't have to report revenue until the year they receive cash or checks in hand or through the mail. To take advantage of this option, put off sending out some invoices for work completed in late December so that you won't get paid until early 2016.
If you expect your business tax rate to increase next year, try the reverse of these strategies to increase your 2015 taxable income and lower your 2016 income.
For example, a cash-basis taxpayer who anticipates being in a higher tax bracket in 2016 might ship and invoice before year end products scheduled for delivery in early January in the hope that customers will pay by Dec. 31 and hold off on sending checks to vendors until after Jan. 1.
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.