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Tax Planning Steps at Year End - Tax Deductions and Tax Credits

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Step One - Timing Income and Expenses

Before the end of every tax year, you have the opportunity to save money on taxes by timing, by taking deductions, and by spending money (if you have it, that is) on certain items. This series will help you look at these tax-saving possibilities, starting with the general concept of timing.

Timing Income
As you get to the end of your business tax year, you may have the option of taking income in this year or next year. If you can take income in the year of the lower profit, you may be able to minimize your taxes.

For example, if this year you will have a loss, but you know you will have a profit next year, you may want to encourage customers to pay you this year when your profits will be lower. If you think your profit will be lower next year, try to move payments from customers into next year. This is tricky, since you don't really know what will happen next year, but it is worth a discussion with your tax adviser.

Timing Expenses
When considering whether to take a deduction for an expense this year or next year, here are three points to take into account:

  • Take the deduction the year when your profit is higher. This will result in lower profits in that year.
  • Take the deduction in the year when the deduction amount is higher. Some deductions change from year to year. Learning about these changes can save you money by allowing you to take the deduction when it is higher.
  • Take the deduction in the year when the tax rates are higher. If you know that business tax rates will increase next year, take the deductions next year to minimize your taxable income in that year.

The principle of timing income and expense deductions, if done thoughtfully and with the assistance of your tax adviser, should lower your business taxes.

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