Heads up: this article is only relevant for U.S. businesses.
Year end tax moves are a great way to reduce the cost of your tax bill, but you need to make these moves before December 31.
To help you get the most out of your next tax return, here are four common small business tax moves to consider.
Defer income until January
If you have a bunch of invoices to send, consider waiting until January 2019. Any income you defer until the new year won’t be taxable until 2020 (you’ll have to pay taxes on it, but not for another year).
Salvage bad debt deductions
If you use the accrual bookkeeping method, and someone owes you money that you can’t collect, you may have what’s known as “bad debt.” The IRS allows you to deduct the cost of bad debt from your tax return, but you need to prove that you took reasonable steps to collect the debt.
A business deducts its bad debts from gross income when figuring its taxable income. Business bad debts may be deducted in part or in full. You can claim a business bad debt using either the specific charge-off method or the nonaccrual experience method.
Use the final weeks of 2018 to attempt to collect all outstanding payments, and keep a detailed record of your debt collection efforts.
Find full instructions on claiming bad debt as a tax deduction on the IRS website.
Make office improvements and repairs
The cost of making minor repairs to your business premises should be tax deductible so, if you can, make all necessary repairs before December 31.
The IRS categorizes the cost of property maintenance as either “repairs” or “improvements.”
You can generally deduct the cost of a routine repair within a single year.
The cost of improvements, on the other hand, generally need to be depreciated over a period of up to 27.5 years. Changes to a property are classified as “improvements” when they include “betterment, adaptation, or restoration.”
Before approving any expenditure on office maintenance and repairs, it’s a good idea to have your CPA or tax advisor determine whether it can be deducted as a “repair” or as an “improvement.”
Start a new business
Did you start a new business or venture in 2018? As long as your start-up expenses did not exceed $50,000, you can generally deduct $5,000 in business start-up costs during your first year of business. If you incurred over $50,000 in start-up costs, your available first-year deductions will be lowered by the amount that you exceed $50,000. For example, if you spent $52,500, you’d only be able to deduct $2,500.
To qualify for this tax deduction, the venture must launch before year-end and be an ongoing activity.
Also, if you researched a business that failed to launch, you may still be eligible for a tax deduction. Whether you’re able to deduct the costs incurred here depends on the specificity of the research you completed. If you were investigating a specific business to create or acquire, you can deduct personal expenses incurred on Form 1040 (Schedule A) under “miscellaneous expenses.”
Alternatively, if you don’t have a specific business in mind and nothing comes of your research, you can’t deduct the costs you incurred during research or investigation.
This deduction is complex, so consult with your CPA to determine what is and isn’t deductible for any given year before you claim it on your return.
Buy bookkeeping in bulk
The cost of services can also be deducted, provided the service qualifies as a business expense. If you plan to pay a bookkeeper or use an online bookkeeping service to help you catch up on a large backlog of bookkeeping, arrange and pay for the service before December 31 and claim the expense as a tax deduction.
Ask about our catch up bookkeeping service if you’re behind on your books for the year.