Tax Planning for 2016
As a business owner, December means cleaning up my books and preparing to submit necessary documents to my CPA. Going through expenses, deciphering what is a business expense vs. a personal expense and reporting my income for the last year is never fun, but at least I am doing it while it’s almost too cold to go outside, rather than in July when I want to be out on the lake… Below are a few things to consider as the end of 2016 is fast approaching:
1. Handle Income and Expenses through Year-End. Take time to go through your monthly income and expenses and double check that everything is accounted for. If you are a service industry, you likely report on a “cash basis”, so you have some flexibility when it comes to reporting. If it makes sense from a tax perspective, you can, for example, delay invoicing for work you do in December so you’ll receive payment and pay tax on that income in the new year. As long as you don’t have immediate cash flow concerns, this option may be preferable. Similarly, you can purchase supplies needed for next year to maximize your deductions this year. New printer, anyone?
2. Pay Year-End Bonuses. Sharing is caring and December is the month to show your appreciation. If you’ve had a good year, consider sharing your good fortune with your employees and/or contract workers.
3. Set up a Qualified Retirement Account. If you don’t yet have a plan in place, you can sign the paperwork for a qualified retirement plan by the end of the year, and still have until the date your 2016 tax return is due to fund it. Set it up now, fund it by April.
4. Fund your IRA. If you have an IRA, fund it. This one is a no-brainer and easy enough for everyone to take advantage of. You can contribute up to $5,500 for 2016 and 2017 to your IRA (individual retirement account) and put that on your tax return. If you’re over 55, you can add an additional $1,000.
5. Make Charitable Contributions. If you itemize your tax deductions on your return, making a charitable contribution is one way to increase your deductions and taxable income. This is a win-win. And, in the event you do not utilize the full amount of the deduction, you can carry forward the unused portion for five years.