Year-End Tax Strategies: What You Should Do NOW to Maximize Savings
My article today is going to be a short one focused on some tax strategies you should start thinking about to reduce your reportable income. Since we are rounding out the third quarter and about to enter the fourth, it’s a good idea to go ahead and start organizing your documents related to your business for the year. It’s time to get your bookkeeping solution in check and up-to-date and speak with your CPA or accountant to discuss any year-end planning tips/strategies that you can utilize to improve efficiencies and lower your tax liability.
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Please do not wait until the last minute to get your books in order unless you don’t mind paying a premium for your CPA or accountant to review and organize your books.
Do You Expect to Show Income?
Whether you are a real estate agent, flipper, wholesaler, buy and holder, or regular business owner, you want to start looking at whether or not you are going to show income for the year, and if so, what "end of year" strategies can you implement to reduce your tax liability. I check in with all of my clients at the end of October/early November to determine exactly how much income we expect to show and what we can do to reduce the income we report.
If you own rental property and are planning to show taxable income (that is, net of depreciation and amortization), here are some things you can do to reduce taxable income:
- Determine if repairs to your properties need to be made and whether or not it’s feasible to make the repairs this year. If so, plan with your CPA the timing and extent of the repairs. Expenditures classified as repairs are deductible in the year the repairs are made. You don’t want to go through the effort of making repairs only to find out you have to capitalize and depreciate the expenditure due to poor planning.
- Look ahead to next year and determine whether or not any tools or equipment will be required for use through the ordinary course of your business. If so, it may make sense to purchase the tools this year to reduce your taxable income, rather than defer the purchase until next year.
- Tidy up your mileage spreadsheet/reporting tool to make sure all business mileage has been appropriately recorded for the year. You need to be recording your business miles as they occur, but it’s never too late to start. Additionally, get your home office reporting in check.
- Take advantage of the Section 179 deduction, which allows you to deduct personal property items used in the course of your business. You cannot deduct under Section 179 personal property that is placed in your rentals (i.e. appliances), but you can deduct expenses for computers, tools, equipment, and vehicles. Get with your CPA to double check your eligibility.
- Sell non-performing properties or those showing a loss. The loss will be used to offset your passive income and can potentially be claimed on your 1040 to offset ordinary income.
- A stretch—but don’t collect December rents in December; rather, collect in January if feasible. Cash basis tax payers report income when collected, regardless of when the service is performed. Additionally, do not collect January rents before January first.
Businesses Reportable on Schedule C
If you run a business reportable on Schedule C and are planning to show taxable income (that is, net of depreciation and amortization), here are some things you can do to reduce taxable income:
- Take advantage of the Section 179 deduction, which allows you to deduct personal property items such as computers, tools, equipment, and vehicles used in the course of your business. Consider purchasing, if feasible, a truck or heavy SUV that you will use for the remainder of the year in your business at least 50% of the time, and expense some or all of the cost via Section 179. Get with your CPA to double check your eligibility.
- For cash basis accounting entities (likely the majority of readers), charge expenses that you expect to pay next year (i.e. an annual BiggerPockets Pro Membership) before December 31 to take the write-off this year rather than next year. Cash basis taxpayers deduct expenses in the year the expense is incurred, regardless of when the service is fulfilled.
- Along with #2, delay receiving payment for invoices until after December 31 so that the income is reportable next year rather than the current year.
- Take advantage of retirement accounts, health accounts (i.e. HSAs) and medical expenses.
- If you are running out of an entity, review your payroll strategies and determine if you can implement additional strategies to reduce your self-employment tax and overall tax exposure.
- Square away mileage reporting and home office reporting.
If you are generally expecting to be within the same tax bracket next year as you are this year, then fully take advantage of as many deductions as you can. Use the lists above as good starting points.
On the other hand, if you reasonably expect your business to thrive next year, therefore placing you in a higher tax bracket, you actually want to defer as many expenses as possible and recognize as much income this year as you can. You will want to take deductions when you are in the higher tax brackets to get a better bang for your buck.
Lastly, start organizing your books and documents today and plan to get with your CPA within the next couple of months to have an in-depth discussion about your tax position. If your CPA can’t make time for end of year planning, it’s time to get a new CPA.
Have you started planning for tax season?
Leave all your questions and comments below!