As the year draws to a close, business owners have some important financial decisions they’ll need to make. These decisions can impact not only your taxes for the year, but your entire financial outlook. It’s important to carefully consider your financial options and their impacts, so that you can set your company up for success next year and for several years to come. Here are some of those end-of-year financial decisions you should be considering.
Should You Pay Your Employees a Bonus?
An end-of-year bonus is a nice way to express appreciation to your employees at the end of the year. However, it’s not always an option for every business owner; or, if it is an option, you have to carefully consider how much of a bonus you will give each employee. Additionally, you’ll need to think about whether you’ll pay the bonus in December, or wait until January. Depending on your finances, one may be more beneficial from a tax standpoint than the other.
Should You Pay Yourself a Distribution?
The answer to this one will depend largely on your business’s current tax structure. For example, if your business is registered as an S Corp, and you’ve received a reasonable salary throughout the year, the best way to pay out year-end profits is through a distribution. Minimizing wages and maximizing distributions can help reduce your Social Security and Medicare taxes as a business owner.
Paying yourself a bonus or distribution is something that should be discussed in detail with your financial or tax advisor so that you can determine the best option.
Should You Make Additional Purchases?
From a tax standpoint, making additional purchases for your business can often be the smart financial move. If you’re in need of new office furniture or equipment, making those purchases now can reduce your taxable income for the year, and potentially even bring you into a lower tax bracket. The right amount to spend on such purchases will depend on your income, so you should consult with a tax professional before making these decisions.
Additionally, you’ll need to ensure that all purchasing decisions you make are qualifying, tax-deductible business expenses. While you might assume that it’s quite easy to determine which purchases are for business purposes, there are many gray areas that can be difficult to navigate without the assistance of a tax professional.
Should You Push to Collect on Invoices?
End-of-year billing can often complicate matters, especially if your income is taxed on a cash basis. This type of taxation means that you pay taxes based on when you receive the income, rather than when the work was performed. So, you’ll need to ask yourself how collecting on your December invoices before the end of the year will impact your net income, versus the impact it will have if you don’t collect on them until January.
While you don’t always have total control over whether or not a customer pays your invoice earlier than you’d planned on, you can opt to push your customers to settle their bills before the end of the year, if this is beneficial to you. If you determine that it’s more beneficial to not be paid until January, you can offer a delayed payment option or simply set a later due date on the invoice and not push the client for payment before that day.
Please keep in mind that if you receive payment this year, but don’t deposit it until January, the income still counts towards the current tax year.
Will You Have Funds for Your Tax Bill?
Most business owners and self-employed individuals will find themselves owing taxes when the file their return next year. It’s a good idea to work with a CPA to get an estimate of what you’ll owe now, so that you can ensure that you’ll have the funding available to pay that tax bill. Overdue taxes can have negative impacts on your business, and may even lead to the IRS seizing business equipment or levying your accounts receivable. Start tax planning now so you can avoid a last-minute scramble to put together funds for your tax bill.
As we approach the end of the year, it’s time to start thinking about these important decisions and how they’ll affect your business. Contact Peter Witts CPA today to discuss your business’s taxes and your overall financial situation, and get the guidance you need when making these important decisions. We specialize in working with business owners like you, and can help set your company up for success in the coming year.