This is a slow week for the country and many are taking time off this week. But, for many small business owners, the dust is clearing on their 2011 financial performance and it's not too late to make a few last-minute moves to save on taxes. Towards that end, here are a few useful tax tips for entrepreneurs.
Generally speaking, to reduce 2011 taxes, businesses can defer income recognition into 2012 or accelerate expenditures into 2011 to reduce taxes. These strategies are especially relevant for "cash basis" tax payers, which is what most self-employed individuals and small businesses are. For cash-basis companies, income is recognized upon receipt and deductions are recognized when expenses are paid.
The first strategy, deferring income into 2012, involves billing customers late in December 2011, such that their payments are likely to be made in 2012. Given that it's now December 29, 2011, it's a bit late to pursue that strategy if you didn't already pursue it. Whatever payments have come in or are about to come in are in process, and there's not much you can do about it.
Sitting on checks that come in is not an option. If the check arrived in time for you to deposit it, you can't just wait to deposit it until after January 1. The IRS deems your having got the check to be what's called a "constructive receipt" and, accordingly, the revenue needs to be booked in 2011 and is therefore taxable in 2011.
With just two days left in 2011, the best option for small business tax optimization is to spend, spend, spend. Anything that can be done to lower your operating income for 2011 will lower your taxes. Pay any invoices that you have received. You can also prepay things that you would normally pay for in 2012. Finally, you may want to buy a few last-minute purchases in 2011 or make a donation. All of these things will lower your 2011 income and thus lower your 2011 tax obligation.
Not having enough money in the bank doesn't have to impede your tax saving efforts. You can purchase items on a credit card and still deduct those items in 2011 even if you don't end up paying off the balance until 2012.
But, for goodness sakes, be sensible when pursuing year-end small business tax strategies. Don't buy things you don't need or overspend. While smart business owners are good at minimizing taxes, the smartest business owners treat every dollar as precious and never spend frivolously. Indeed, it's better to pay taxes on profits than to spend your profits down in a way that doesn't intelligently support the healthy growth of your company.
One final thing to look at as the year winds down -- make sure your tax withholdings that you've paid in for federal and state taxes are sufficient. If they are too low, you may be in for a rude surprise in the form of tax penalties. The final payroll of the year, which you are probably completing today, can include a catch-up withholding amount that can help you steer clear of IRS penalties for underwithholding.
Long story short, turn off the television, get off the couch and put the eggnog down. If you own a business and you've not yet made any smart moves to reduce your 2011 taxes, it's not too late. But the clock is ticking, so get busy.
Our reporters give you breaking news that focuses on entrepreneurship. Our perspective is all about giving you news you can use to start and grow your business.