Reviewing finances in the fourth quarter of the year can help provide business owners with the greatest chance of taking action to lower the year's tax liability. Once the New Year begins, many options for lowering a tax bill are no longer available. Businesses that wait until March or April to plan for taxes often miss out on many of the best options for reducing what is owed.
The first step of this review process is to meet with your accountant to assess your likely tax situation. With a sense of your liability, you may be able to lower it by taking one or more of the following steps.
Accelerate expenses
Move anticipated business expenses for next year onto this year's books as a way to offset current income. While you don't want to interrupt your company's cash flow, there are likely a number of operating costs that can be pushed up. For example, you may be able to prepay several months' worth of office rent, insurance payments, or deductible interest on business loans. If you expect to travel for business, set up and pay for trips that will occur after the beginning of the year. Similarly, you can speed up state and local tax payments -- first quarter estimated taxes, often due on January 15, can be paid before the end of the year and used against this year's income. Remember, however, that any expenses that are shifted into the current year cannot be taken again next year.
Delay income
In addition to moving expenses forward, your company can also put off income. If your business expects to have significant billings to customers at or near the end of the year, you might want to delay these invoices until the following year. This can help reduce the amount of taxable income you have for the current year.
Max out your Section 179
Consider taking full advantage of the Section 179 -- or first-year expensing -- deduction, which allows you to write off the full cost of certain equipment purchases instead of depreciating them over time. If you plan to buy business equipment such as computers, fax machines, copiers, phone systems, or other fixed assets in the first several months of next year, consider pushing up the purchases into your current year to get you as close to the first-year expense limit as possible. For 2002, that figure is $24,000, rising to $25,000 in 2003.
Create and contribute to a retirement plan
Make tax-deductible contributions to an employer-sponsored retirement plan. If you company doesn't have one, set one up. Both Keogh plans and 401(k) plans must be set up by the end of the tax year, although contributions often can be made up until the due date of your business' tax return. A Simplified Employee Pension (SEP) plan can be created as late as the due date of your tax return (including extensions).
Put bonuses on the books
Businesses that use the accrual method of accounting can record (and deduct) employee bonuses before the end of the year, but can pay them any time within the first 2 1/2 months of the following year. Generally, the amount of the bonus and the employee's right to the bonus must be established before the end of the year, but payment can be made the following year as a form of deferred compensation. Companies that use the cash method of accounting can only deduct employee bonuses in the year they're paid.
Review outstanding debts
Make an effort to collect long outstanding debts before the end of the year so you can record them as "bad debts" before the close of the year. For companies that provide goods, bad debts are generally considered to be a deductible business expense if they are uncollectible. If you sell services, however, you may not be able to deduct an unpaid bill as a deduction.