In our recent Friday Hangouts on Google Plus we have been developing a tax projection template. The purpose of this is first and foremost to make sure clients are penalty free. This means that in the current year you have to have paid in at least 90% of what you owed last year or 100% of this year’s tax liability. Assuming you haven’t paid in enough, or you owe too much, you will want pick up additional tax deductions before the end of the year.
The issue is that this year can only be projected based on what you have now year to date (YTD) and what you can project for the remainder of the year. Since most of us are cash basis tax payers we have to post all salaries and pay any expenses before Dec 31 in order to be able to list them as tax deductions for this year. It would be great if I could simply accrue a huge salary at yearend to get the tax deductions and zero out my income, but it just doesn’t work that way. Cash basis says you gotta pay it to claim it as a tax deduction.
The template is almost complete and it will help you analyze scenarios in terms of making sure you have paid enough officer’s salaries for S-Corps as well as other things that will impact your tax deductions and the related tax liability.
The first thing you have to do is look at your profit and loss statement YTD. What does the net income look like? What about any salaries you’ve paid yourself so far? The template we are working on will help with this analysis.
What if you find you have too much income? You want to see how you can “legitimately” take advantage of some more tax deductions in order to lower your tax liability for this year. Bottom line is you also need to have some cash to spend. This is why it is always good to make sure you have access to cash. I learned that a long time ago – always make sure you have access to cash if you need it. It might even be worth incurring come interest cost to save on taxes, as long as the taxes saved with the additional deductions outweighs the interest cost of borrowing the cash you use to pay for those tax deductions.
While working on the template Mariette Martinez helped with some feedback that contributed directly to the development of the template. Part of this process included having me add in an area that allows you to list additional items you can pay for and deduct before the end of the year. Mariette brought up major asset purchases, which using Section 179 can be deducted entirely in the current year. This is a way of getting some very large tax deductions before yearend.
If you don’t have $12,000 to spend between now and December 31 on some additional tax deductions, perhaps something more modest in amount. A subscription to schoolofbookkeeping.com might do the trick! In fact an annual subscription paid before yearend equals the entire amount deducted because you’re on a cash basis. This means you get the tax deductions for what you pay regardless of proper matching and what time period the expense is incurred for. It is deducted entirely when paid.
What other tax deductions can you think of that people can take advantage of before yearend? Hint for my EA and CPA friends – I have not even touched on retirement plans and options.
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