Tax planning and tax preparation are two different activities. Tax preparation records what happened. Tax planning changes what happens before the year ends. The window for most small business tax planning closes on December 31—these are the moves worth making before then.
Accelerate Deductions
If you expect to be in a similar or lower tax bracket next year, accelerate deductible expenses into the current year. Pay outstanding invoices for deductible business expenses, prepay rent or subscription fees for next year (within limits), and make retirement plan contributions before year-end.
Defer Income Where Possible
If you expect to be in a similar or lower tax bracket next year, deferring income reduces your current-year tax liability. Invoice customers in late December for work done, but with payment terms extending into January. Do not defer income into a year where you expect a higher rate.
Key Takeaways
- Year-end deduction acceleration and income deferral can shift significant income between tax years.
- Retirement plan contributions before December 31 reduce taxable income dollar for dollar.
- Bonus depreciation for equipment purchases requires the equipment to be placed in service before year-end.
