It’s the 1st of December, the unofficial beginning of tax season. This is when I do the final tax planning sessions with all of my clients.
We need to think about the moves we’ll need to make to legally end up in a reasonable taxation position. It should be noted that all of this is subject to change. If Congress and the President do decide to sign something into law this year, then everything I’m about to say could change in an instant.
That being said, here’s a few things to consider.
Cash Basis Taxpayer
If your company is on the Cash Basis, then any deductible expenses written out of your check book that will clear given your collected balance, whether they go through the account or not this year, can be deducted on your 2023 income taxes. You’ll be taxed on any cash increases left in the business that were a result of normal operations.
If you’re an S Corp or a partnership and decide at the end of the year to write yourself a large distribution check to get rid of your cash balance that doesn’t go through payroll, this won’t help. It wouldn’t be a deductible expense from an income tax standpoint and you would end up paying income tax on the distribution.
Accrual Basis Taxpayer
If your business is on the accrual basis, then writing every check in your checkbook won’t help because we’re going to expense your Accounts Payable at the end of the year anyway.
Speaking in general terms, the differences between your beginning and ending accruals will make all the difference. The only balance that matters is the change in ending balances as of 12/31/2023.
Again speaking in generalities, as assets increase, so will your net income. If assets decrease, so will your net income. Consider this when handling your Accounts Receivable and Inventory Balances.
Liabilities generally work in the opposite direction. As liabilities decrease, your net income will increase. If liabilities increase, then your net income will decrease. Consider this when thinking about your Accounts Payable.
Tax Planning Basics
The process of tax planning is the legal process of effecting the change on your financial statements that will provide the desired result for the year in question. This can go in a couple of different directions.
If you’re in a year where you know you won’t need to walk into a bank and ask for money in the next 24 months, then maybe we’d want to limit your income and therefore your income tax liability. As such, we’d manage your financial statements in a manner that would reflect your goals for the year.
But if you’re in a year, where you know you’ll need to walk into a bank and ask for money in the short term, then the opposite may be true. We’re not talking about doing anything that’s wrong or illegal. It’s just heads up financial management.
Let’s use an example.
Have you ever noticed that when you walk into big box stores around New Years, they have more inventory than even the shelves will hold? The Home Depot in my neighborhood stores their excess inventory out in the alley.
Have you ever wondered why this happens?
If they radically increase their inventory before the end of the year, it will add to their income in that calendar year. And if the payment terms on that inventory doesn’t begin until the following year, then their Accounts Payable won’t be affected.
They have less expenses for the year which creates more income. It may be only a momentary change, but they then have beautifully profitable income statements for the first year in question and everyone gets their Christmas Bonus.
Again, we’re not talking about doing anything that’s wrong or illegal. Big companies have been doing it for years. We’re just using the rules of accountancy and taxation in our favor for a change. This is just one move out of the dozens in my bag that can help you whether your company is a cash or accrual basis taxpayer.
Get your work into me as soon as possible. I can’t do any reasonable tax planning if I don’t have a solid November Balance Sheet in place.
There’s much more to discuss, but the time to begin thinking about year-end tax planning is now. We’ll talk more when doing your actual planning.
If you don’t have an accountant who does this for you then please dial 773-267-7500. Ask for Chris. There’s plenty that we can do to help you.
We’re all going to get through this. Let’s get through it together.
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