When you work hard to earn money as a small business owner, the last thing you want to do is pay more of it as taxes than you have to. One way to avoid unnecessary tax is to defer or accelerate income, deductions, and expenses. Here are four ways you can do that.
1. Defer or Accelerate Income
The year in which you receive income determines when it's taxed. So if you've had a high-earning year, you may want to defer some income into the new year. Cash basis business taxpayers can more easily defer income legitimately, but accrual taxpayers may be able to do this by paying attention to timing. On the other hand, if you've had a loss this year, you may want to add more income into the current year.
2. Defer or Accelerate Purchases
Deductible business expenses are one of the easiest ways that nearly any business owner has to lower their taxes. Moving forward with a purchase in the current year can provide a deduction against a high-earning year. If you expect to do better next year, though, you should consider delaying large purchases to take advantage of them in a profitable year.
3. Defer or Accelerate Depreciation
Depreciation is the act of spreading out the deduction for a large capital purchase over several years instead of taking it all in one year.
Current tax law often allows you to choose between the two methods and use whichever results in lower taxes. Accelerated deprecation — using the full purchase amount at the beginning of the asset's life — is good for businesses without many other deductions or which have a lot of profit. If you don't need the deduction, though, you may want to use it for future years.
4. Defer or Accelerate Other Years' Losses
If your business has a bad year and sees a net loss on its taxes, you may be able to choose how to use this loss. Under normal circumstances, you can often carry a net loss forward to future returns to use against profit. However, the CARES Act also allows some businesses to carry certain losses backward to prior years. You may use the option that lowers your taxes the most.
Where to Learn More
Want to know more about how to legally defer or accelerate income, expenses, losses, or purchases? The IRS rules can be confusing, so begin by consulting with a local business consulting service. Although it may require effort and time to learn the nuances of these choices, the result will be a more profitable company and more money in your pocket.