Reduce your Taxes at Year's End

Last Ditch Tax Tips for the Year's End

Most of my clients call at some point in December and ask, "What can we do to reduce our tax liability?" I'm always happy to hear that question, because it means they've made enough during the year to be worried! So what can you do in the last days of December to reduce your tax bill?

Revisit your 2008 accounting BEFORE the year ends. Most companies don't really examine their books until well into the following year as the tax crunch begins to loom large. It's important as part of your year-end business strategy to have a good understanding of your company's financial situation before the year is over. That way you not only ensure that your books are accurate, you also have the information you need to 'guesstimate' your tax liability and make last minute decisions about spending, giving and deposits.

Examine your inventory. Inventory write-offs can be significant. The drop in market value of any inventory you have on hand can potentially provide your company with deductions. Depending on your accounting methods, you may also want to track any goods that have been damaged or have become obsolete.

Put money into a retirement plan. This is the time of year to make payments into your retirement plan or set up a final contribution before the end of the year to reduce your income. You'll have to check the contribution limits for your type of plan and decide what your budget will allow. 401(k)s, KEOGH plans, Roth IRAs or SEPs are all great places to shelter some funds for future years. As always, you need to discuss the best strategy with your financial planner or accountant.

Defer income into 2009. Any payments your business can receive during the first week of January as opposed to December will cut your tax bill. Every cent deferred until January 2009 will not owe taxes until April 2010. Your specific deferral strategy should be driven by your projected annual profits and legal structure (LLC, partnership, corporation, etc). Depending on your income tax rates in the foreseeable new year, deferral of income can make good sense for many sole proprietors, partnerships, LLC's, and S corporations.

Give a little bit away. Charities are hurting right now, and companies that are doing well can benefit from making last minute donations. Think about donations you may have planned for 2009 and push them back into 2008. Make sure you get a receipt for all tax deductible gifts.

Boost your Expenses. This sounds nutty, but if your cash flow allows you to spend at the end of the year you can save a bundle on your taxes. Purchase items your business will require in the immediate future to maximize deductions for this year. If you can see a need for goods and services in the first quarter of the new year, pay for them now and let those expenses count for 2008. Consider stocking up on paper, printer cartridges and other office items. Order promotional materials like flyers and business cards. Pay your January bills before the new year in areas such as phone services, subscriptions, insurance, rent and utilities. Get repairs made and book 2009 travel early. Buy any new office equipment or furniture you need. (You do have to weigh whether or not it is best to take a write off now or spread out the depreciation over years, but buying fixed assets can be a great tax reduction strategy.)

Every situation is unique, and each business owner has to decide whether or not it makes sense to reduce tax liability in the current year. Sometimes if you are projecting increasing sales it's a better call to just pay your tax bill and not make future tax burdens heavier, but if you are concerned about your tax liability for 2008 these are some great tips that can help you save money!