Tax Tip 1: Defer Income and Accelerate Expenses

If you are a business using cash-based accounting for tax purposes, this is one of the simplest options to implement – assuming your cash position allows for it!

Basically, if you want to lower your taxable income for the current year, think about holding off on income and speeding up expenses where possible. Here’s how that works:

Holding Off Income

1. Delay Invoicing:
   • Hold off on sending invoices until late December or early January for work performed in the final weeks of the year. This shifts the receipt of payment (and so delays the income recognition) into the following year.
2. Encourage Payment Flexibility:
   • If your clients are happy to do this, you can ask them to delay paying any outstanding invoices to January instead of paying them in December but, that may not work if they are following the same tactic.
3. Manage Prepayments:
   • Avoid receiving prepayments for goods or services that you will not deliver until the following year.

WARNING: This is a great strategy if you expect to be in the same (or lower) tax bracket in the following year but, if you are predicting a large growth in income strategy the following year, it could actually make more sense to not implement this option and recognize income in the current year as you’ll be in a lower tax bracket.

You also need to keep a sharp eye on your cash flow so you can cover your expenses so have your business cash flow forecast to hand when you speak to your tax preparer.

Speeding up Expenses

Accelerating expenses involves paying for future costs or bringing planned expenses forward to reduce taxable income in the current year. Again, this strategy is most effective for businesses on cash-basis accounting, where expenses are deducted when paid, assuming that you have the cash available to do this.
1. Pay Outstanding Bills:
   • Settle any outstanding bills or vendor invoices before December 31.
2. Prepay Business Expenses:
   • Consider prepaying expenses like rent, insurance or advertising for the first few months of the next year. Many of these are deductible in the year they are paid.
3. Purchase Supplies and Equipment:
   • Stock up on office supplies, materials, or other essentials your business needs. For larger purchases like machinery or other business assets, you may also qualify for Section 179 expensing (which we will cover later), which allows you to expense full purchase price of qualifying equipment or property in the year it is placed in service, or bonus depreciation.
4. Make Employer Contributions:
   • Fund employee benefits or retirement plan contributions by year-end to claim deductions in the current tax year.

WARNING: If you are going to make prepayments, please ensure these comply with IRS rules, for example, you can generally only deduct prepayments that don’t extend more then 12 months into the future. Also, if you are thinking of purchasing machinery or other business assets, please reach out to your tax preparer for advice. Again, please keep a sharp eye on your cash flow so you can cover your other expenses.

Example: Putting It All Together

Let’s say you’re a small business owner expecting to earn $150,000 in the current financial year. By applying this strategy:

• Defer Income: Delay $10,000 worth of December invoices until January, reducing taxable income for 2024.
• Accelerate Expenses: Prepay $5,000 in rent for January-March 2025 and purchase $3,000 worth of supplies. This reduces taxable income further.

Result: Your taxable income for the current tax year drops from $150,000 to $132,000, potentially lowering your tax bill.

By strategically deferring income and accelerating expenses, you can effectively reduce your taxable income and keep more money in your business but please remember to talk to your tax preparer to ensure compliance and maximize the benefits of this strategy.