As the holidays quickly approach it’s hardly a time to think about small business taxes. But a quick look at these year-end tax tips for small business can pay big dividends for 2008.

5 Year-end Small Business Tax Tips

1. Update Your Accounting: It’s important as part of your year-end tax strategy to have a good understanding of your company’s financial situation. Spend extra time ensuring your books are up-to-date and accurate. It won’t hurt to plan time with your accountant for year-end advice, particular to your operations.

2. Defer Income: Any payments your company can receive during the first week of January as opposed to December cuts your tax bill. Every cent deferred until January 2008 will not owe taxes until April 2009. Any deferral strategy will depend on your profit and losses for the year and business legal structure (LLC, partnership, corporation, etc.)Depending on your income tax rates in the foreseeable new year, deferral of income can make the best sense for many sole proprietors, partnerships, LLC’s, and S corporations. Ensure your cash flow can handle the deferred income.

Don’t forget to push any early 2008 charitable donations back to 2007. Make sure you get a receipt for the tax deduction.

3. Increase Expenses: 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, buy them now, if cash flow permits. Consider the following items for expenses:

• Office Supplies: Stock up on fax paper, printer cartridges, stationary, and other office items.
• Pay Bills Early: Pay your bills before the new year in areas such as; cell services, subscriptions, rent, insurance, and utilities.
• Equipment Purchases: If you will be buying new office equipment, consider purchasing now. You’ll have to decide whether an immediate write off is best or spread out the depreciation over years. Consult with an accountant to examine your circumstance and company structure to maximize your deductions. In addition, your equipment will have to be in your office, “in use” by year-end.
• Other Items: This category includes: pre-payment of subscriptions, travel bookings, equipment repairs, and maintenance.

4. Inventory Write-Offs: Depending on your accounting methods, you may wish to check inventory for goods that have been damaged or have become obsolete. The drop in market value of the inventory can provide your company with added deductions.5. Contribute to a Retirement Plan: Make payments to your retirement plan or set one up before the year-end to reduce your income for this year. Check the contribution limits for your type of plan. In the U.S.: 401(k), KEOGH plan, Roth IRA, or SEP’s. (For SIMPLE IRA’s the deadline is set in October, too late for year-end tax planning.) In Canada: an RRSP. Discuss the best strategy with your financial planner or accountant.

These year-end tax tips will apply differently to each business owner’s situation and accounting method. The cash method of accounting allows for deductions and income reported for the year they are paid or received. The accrual accounting method applies income and deductions in the year incurred. Take the time to review the best strategy with a professional advisor and make the most of the year-end tax planning for your small business.

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People who are financially independent aren’t necessarily making more money or smarter than others, but they are probably better at making financial decisions.  They set their goals, make a plan, and stick to it.  They look at tax implications, returns and risk, project all the figures into the future, and then decide on a course of action.  This sounds complicated, but our calculators and our recommendations are here to help simplify your decisions.  When you have all the information, making decisions becomes much easier.

Throughout this website we have resources, tips and calculators which will allow you to compare different scenarios.  You will be able to see what a big difference a small change in your money management decisions can make.  You may not think that this applies to you when you are young, but this is when it is most important, because you have the luxury of time (and compounding!) on your side.

Some people giving financial advice are in a conflict of interest, because they benefit if you follow their advice.  We do not earn money from any of the recommendations that we make.  Our income is from visitors to our website clicking ads, and from companies licensing our calculators.  The advice on this website is not tailored to anyone’s individual situation.  It is wise to get a second opinion for any financial advice you receive, including ours.  Before making a major financial decision, you should hire an independent professional advisor (paid by the hour) to review your plan.

Every person’s situation is different, and one plan does not fit all.  You need to sit down, define your goals, and figure out your own plan.  Life is a series of choices, and every person is the master of their own fate.  Forming and following the plan requires that you make choices, some of which can be difficult, and some of which will require a lot of dedication.  Everyone’s goals should include buying their own home, and getting out of non-tax-deductible debt as quickly as possible.

The first step to getting organized is to separate your freelance income from other types of income. Keep a record of all your business-related income. Your clients may send you a Form 1099-MISC in January or February to report total payments for the previous year. Form 1099-MISC is like a W-2, it is used to report income you received. The IRS also gets a copy of any 1099s. Your total business income on Schedule C Line 1 must be greater than or equal to the total amount of income reported on your 1099-MISC forms. If you report less income on your Schedule C than reported on your 1099s, you will get a computer-generated audit notice. (That is, the IRS computer matches up your tax return with information the IRS receives, and if there’s a difference, you get audited.) The easiest way to avoid an audit is to report all your income, whether you received a Form 1099 or not.

The second step to getting organized is taking a look especially at the various types of business-related expenses you can report. I highly recommend you start tracking your business-related expenses using the same categories on the Schedule C form. You can track your expenses using envelopes to sort receipts, or using a spreadsheet program, or using a personal finance program such as Quicken. The most relevant categories of expenses for freelance writers include:

• Advertising – this includes business cards and web-marketing
• Insurance – for life, property & casualty, or business insurance. Do not include health insurance under this category.
• Other interest – credit card or loan interest, such as interest paid on your computer loan.
• Legal and professional services – such as fees your accountant will charge
• Office expense – anything other than routine supplies.
• Rent or lease other business property – rent paid on a writer’s studio, for example
• Repairs and maintenance – repairing your computer, for example
• Supplies – routine office supplies like paper, toner, pens, pencils, notepads, etc.
• Travel – the cost of traveling to a convention, meeting, or business trip
• Meals and entertainment – the cost of business meals, but be careful not to go overboard
• Utilities –electricity, gas
• Other expenses – such as Dues & Subscriptions, Web development, and Business telephone expenses.

Most writers have things like a website, high-speed Internet connection, a computer, various software programs, and a small home office where they do most of their work. Writers will typically subscribe to various magazines, trade journals, or research tools. If your expense does not fit neatly into one the categories above, don’t worry. Just create a new category, and put it in Part V for “Other Expenses.” We would put Dues & Subscriptions, Business Telephone, and Website Development under Part V.

Most writers invariably spend money on books, it’s what we love most, and so it is natural that we buy lots of books. In order to be a business expense, the books must be a reasonable and customary expense given your profession. As a tax writer, it is reasonable that I would buy lots of books on taxation, running a business, and personal finance. Those would be allowable business expenses. Also allowable would be reference books such as dictionaries, thesauri, encyclopedias, and so forth. I would list this in Part V, Other Expenses. If you are writing book reviews, movie reviews, or any product that might be seen as a personal expense, just keep your receipts along with a printout of your review. That way the IRS auditor will see that your expense was clearly related to your business activity.

Health Insurance expenses. If you are self-employed and you pay for your own health insurance, then you can deduct the full cost of your health insurance premiums on your Form 1040, line 31. In order to deduct your health insurance expenses, you must have a net profit from your business. If you have zero profit or a net loss, you can still deduct the health insurance premiums. But instead of going on Line 31, you deduct them on Schedule A as a medical expense.