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TAX TALK: Timing Your Business Income and Expenses

Hal Zemel, CPA, J.D., LL.M. 10.24.2016 | TAX TALK

By deferring net taxable income to a later year, you may be able to reduce your current tax liability. You can reduce your taxable income in one of two ways: You can either defer income to next year or you can accelerate deductions into the current year. Here are two timing strategies that can help your business defer net taxable income:

  1. Defer income to next year. If your business uses the cash method of accounting, you can defer billing for your products or services. Or, if you use the accrual method, you can delay shipping products or delivering services.
  2. Accelerate deductible expenses into the current year. If you’re a cash-basis taxpayer, you may pay vendor invoices before Dec. 31, so you can deduct it this year rather than next. Both cash- and accrual-basis taxpayers can charge expenses on a credit card and deduct them in the year charged, regardless of when the credit card bill is paid.

These strategies work best for transactions occurring near year-end, since the deferral of income will also result in your delaying the receipt of cash receipts until the next calendar year and the prepayment of expenses accelerating cash payments into the current calendar year.

However, if you think you’ll be in a higher tax bracket next year (or you expect tax rates to go up), consider taking the opposite approach instead — accelerating income and deferring deductible expenses. This will increase your tax bill this year but can save you tax over the two-year period.

These are only some of the nuances to consider. Please contact me at HZemel@BerdonLLP.com or your Berdon advisor to discuss what timing strategies will work to your tax advantage, based on your specific situation.

Hal Zemel, a Tax Principal at Berdon LLP, has more than 20 years in public accounting and advises businesses in the real estate, service, and manufacturing sectors.

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