Business Tax Strategies: What Works and What Doesn’t
It’s mid-December and it’s time for solopreneurs and all self-employed professionals to think about how much money we’ll be handing over to the tax man this year. Tax planning is usually top of mind at the end of the year, but keep in mind that obsessing over taxes isn’t always helpful. New York CPA and small business specialist Michael Hanley recommends pausing and carefully evaluating the impact aggressive tax strategies would have on your financial situation.
Hanley cautions small business owners and sole proprietors against inflating business expense expenses to lower their tax bill, as deductions are not a dollar-for-dollar benefit. Each dollar written off as a deduction averages just 30 cents in tax savings (depending on your tax bracket and business legal structure). If you have an expensive item to buy and you expect this year’s and next year’s income to be about the same, then buy when you can get the best price for the item, either this year or next year. Your savings may be worth more than your deductible.
Hanley also tackles the apparently common tactic of zeroing out one’s business bank account by December 31st. Paying business expenses, adding to your retirement account, or buying business equipment or supplies can make the zero balance tactic work. Paying a bonus, taking a stock distribution if your business is a corporate entity, paying off your bank line of credit or paying off business credit cards will not give you legal deductions.
Professional development training is tax-deductible, so if you’re strapped for cash and there’s a potentially beneficial seminar or symposium offered at the end of the year or early in the new year, register and pay on or before December 31st. Adding a certification to your CV can make your services appear more valuable to clients and may also justify an increase in your hourly rate and project fee.
You might also consider throwing a holiday party for clients, prospective clients, referral sources, and select business colleagues (which means no one can steal a client!). The cost of the party will be tax deductible, and best of all, it can turn out to be a networking boon that will land you billable hours for the next year and beyond.
Customers and referral sources could also come away with more business and this will make their relationship with you more valuable to them. If you can get a large table or a private room at a restaurant that isn’t necessarily fancy but has a good reputation, then plan your party and use Evite for invitation and RSVP. Allow 7-10 days for responses—last minute invitations can be fine. Spontaneity has its charm, especially this time of year.
Invite 30 guests and expect 10 to show up. Place five or six finger foods and organize a signature cocktail. If anyone asks for beer or wine, let them have it. Your party can be held from 18:00 to 20:00. Most people will have two drinks, the restaurant will tell you how much food to load up on. You’ll probably spend $60/pp, which means a table of 10 will cost around $750.
You might also consider hosting a party for your LinkedIn connections. This would be a great way to introduce your colleagues to each other and could create billable hours as a result. You might want to make this pizza, salad, beer and wine, but so what? It’s a great idea regardless. If you have 100 links, plan to show 25.
If it’s too late to throw a party this year, the cards and stamps used for the December greetings you’ll send to clients and referral sources are tax deductible. Also, if certain clients have provided you with a generous amount of billable hours, perhaps with an ongoing retainer, then send those clients a gift. Confirm with the company’s human resources department whether corporate gifts are permitted and whether there is a maximum gift amount. The gift will enhance the relationship and is also tax deductible.
Thanks for reading,
Kim
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