Timing is Everything in Year-End Tax Planning

"Timing has a lot to do with the outcome of a rain dance." (Old Cowboy quote)

This week, I am focusing on year-end tax planning to save you money on your 2009 business taxes.  In these tough times, we all need as many tax saving ideas as we can get.  Today, I am focusing on timing of income and expenses to get you the lowest taxes possible.

Accounting Method and Timing
Timing of income and expenses is directly related to your accounting method: cash vs. accrual, and year-end income and expenses.

• In cash accounting, you recognize income and expenses when the money is received (income) or paid (expenses). If you bill a customer in December and you don't receive the money until January, you don't have to count the income as being received in December. Expenses work the same way.
• In accrual accounting, you recognize the transaction when it is established. So, in the example above, under accrual accounting you would have to record the income when you sent the bill, and the expense when you received the bill, even if no money changes hands.

Timing Principles
Timing of income and expenses is related to two principles:

1. Which year will have the highest taxes (this year or next year)

2. Which accounting method your business uses

If you know that 2009 will probably have higher taxes than 2010, you would want to reduce your taxes by:

• Moving income into the lower tax year (2009), if possible, and
• Moving expenses into the higher tax year (2010).

You can see that the timing of income and expenses then depends on the accounting method.  To move expenses into 2009, for example, in the cash method you need to pay them in 2009; in accrual accounting, you can get vendors to bill you in 2009; even if you don't pay the bill, the expense is counted in 2009.

Remembering these principles can help you make decisions on income and expenses between now and the end of this year.

For More Information:
Cash vs. Accrual Accounting
Timing Income and Expenses to Lower Taxes