How to Reduce Your Taxable Income
It’s another Expert Briefs, where I ask really smart business owners to answer your burning questions.
This week I asked our panel of experts the same thing I asked last year and the year before (since 2008) …
“If you made more money this year than last year, your quarterly taxes probably won't be enough to cover what you owe (since you'll owe more), assuming everything else in your life remains the same. (Unless you added a deduction like a baby to your family or something…)
Quick explanation (with totally hypothetical numbers):
- Let's say that you made $30,000 in 2012. Your quarterly taxes that you pay in 2013 might be then set at $2000 every 3 months. ($8000 for the year)
- Now, what if you made $60,000 in 2013 – and you're only paying $2000 every 3 months, then come April, you may have a day of reckoning. (You will have paid $8000, but then may owe as much as another $8000 for taxes on the added income.)
So, you'll owe a chunk of money in April.
At the end of the Year, because I've been fortunate enough that my income has grown every year, I Normally End up Making Several Large Purchases in Order to Decrease my Taxable Income for Next Year.
Do you have ways you reduce your taxable income? If so, what kinds of things do you purchase?”
I think you'll find the answers this week interesting and helpful in your business tax planning and preparations.
** Note: Contact YOUR CPA/Financial Adviser before making any decisions. The following people are not professionals in regard to tax laws.
Jeanette S. Cates, PhD of Plan Your Online Business says:
Actually I AM an accountant! That was my Bachelors' degree. My first business was a bookkeeping and tax service that I “invented” so I could write off my first computer. Happily, I sold that business for a nice profit 3 years later. But taxes remain a hobby for me.
Okay, if you're still reading (and not laughing at that “taxes as a hobby” comment), the secret to tax savings is timing. You don't necessarily WANT to reduce your taxes this year. If you're new in the business, it's likely that you'll make more next year and need more deductions. Likewise, there's a good chance that tax rates are going up, if the government has anything to say about it. So again, you may want to defer those expenditures until January.
But if you do want a deduction this year, here are a few easy ones –
- Office supplies (stock up!)
- Phones and tablets, if used more than 50% for business
- Contractors and employees (pay before the end of the year – they'll love it
- and you get the deduction)
- Affiliate payments (pay them at the end of December for sales to that point.
- Welcome money for them – deduction for you).
- Donations – always in season!
Dr. Mani of How to Set Goals says:
Not sure how relevant the details of my situation will be to your audience, Nicole, because I live in India but I'll share some thoughts any way…
1. Quickly review the current status of tax exempt and tax deductible investments/expenses (they keep changing often) to know what will qualify and what won't.
2. Talk with my accountant, discussing specifics based on projected earnings, and get an idea about how much to spend or invest to optimize taxes.
3. Look at my ‘wish list' for things to buy, and see if any would qualify for a tax break. If they do, plan a purchase date.
4. Decide on my annual contribution to charity (a sizable share of my online income goes to sponsor heart surgery for children through the Dr.Mani Children Heart Foundation). Donations are eligible for a partial tax exemption in India. Though it isn't WHY I do this, I do claim the incidental benefit!
One mistake from my past I will NOT repeat is trying to defer getting paid for some things until the next financial year, thinking it'll help save some on taxes. Didn't work out too well, that idea 😉
David Perdew of NAMS says:
December brings back fond memories from my corporate newspaper days.
All year, as the Director of Photography in charge of a multi-million budget, I was supposed to come in 10 percent under projections by the end of the year.
Then, in December, when I had accomplished the goal of keeping expenses way down by penny-pinching all year long, the corporate office would call in a panic. “Taxes are going to kill us. Spend as much as you can.”
It was like Christmas in the photo department. Everyone got new cameras. We bought all of our film for the following year. (Yep, this was pre-digital.) And, then we bought refrigerators to hold the film so it wouldn't go bad.
In January, we were back to penny-pinching for the next year, only to repeat the process at the end of the year.
I got pretty good at it.
And now, with my own little business, I can’t spend millions at the end of the year, but I like to make any big purchases if I can before Dec. 31 like computers, printers or software. Especially, if they can be expensed instead of amortized.
The key was to take delivery before Dec. 31. So, ordering a new computer on Dec. 31 didn’t count. It had to be in the place of business. I’m not sure it still works that way, but I adhere to it anyway.
And of course, dumping cash is a good thing which means paying as many affiliates as possible by the end of the year to put the tax burden on them. Sorry. Paying taxes is an awesome problem to have because you obviously are making enough to be concerned.
Paying as little taxes as possible legally is the gift from our crazy government…
I think the NAMS Workshop is one of the only Online Business Marketing Workshops that teaches taxes, legal issues, and business infrastructure as well as making more sales.
Dennis Becker of Earn1KaDay says:
This is the time of the year when I contribute to the charities that are meaningful to me.
I also look to pick up more premium licenses for products that can be used either inside my membership sites, to sell, or ideally both.
And I pay bills a little early, for example in late December even if they're due in January.
Kevin Riley of Blogpreneur Training says:
Since I live in Japan, I'm dealing with a tax system that differs quite a bit from what I dealt with in North America. However, some of the following advice (especially, to keep all your receipts) probably applies in all countries.
One benefit we enjoy in Japan is the no-limit entertainment expenses deduction. Due to our culture of entertaining prospects and customers, the Japanese tax system does not limit you on how much you can deduct for entertainment. Therefore, any time I go drinking, eating, or otherwise spending money in a fun way, I ask for an official receipt (ryoushushou). Find out what you can deduct, and make it a habit to always save your receipts.
Since my office is in my home, I also can deduct a percentage of all home expenses from my income tax. This means that I can deduct a percentage of rent, water, electricity, and grounds maintenance fees. This is a deduction I also enjoyed in Canada, so look into it for where you live. This can make a huge difference in the amount of tax you pay.
Nicole Dean of .. here! .. says:
If you made significantly more money with your online business this year than you did last year, CONGRATULATIONS! That's wonderful news.
However, next year at tax time you might not think so — if you've got to come up with an extra $17,000 to fork over in April like I did one year.
Basically, it comes down to how much money you made (which is the overall amount that you took in minus expenses). That’s what we’re taxed on.
Two years ago, in December, I purchased approximately $5000 in advertising and paid my affiliates early and prepaid some subscriptions in order to lessen my income. (The expenses get subtracted from my income so my overall income would be less — therefore less taxable income.)
So, since advertising is an expense, I choose to spend money on it, knowing that it’ll pay me back (and then some) the following year.
As to how much is the right amount for you to spend… you’d have to run those numbers with your CPA/Accountant. Normally I spend a bunch in December, then we run the numbers again in January to see how much I should put into my SEP (which is like a 401K) to give me the best tax breaks in April.
WARNING!!!! Don’t go spending money you don’t have on things that you don’t NEED. You’re still spending money.
However, if you plan to buy things anyway.. or have a birthday coming in February like I do and want to treat yourself to some business items, then buying early can be a smart move – especially if you're planning for growth for next year.
For instance, I do some consulting for high level marketers on their affiliate programs — and I've gotten more than my regular amount of requests this month — probably because they're planning for next year. So, why not have them prepay and save on their taxes?
Now, I’m not a tax adviser (nor a doctor nor a lawyer), but I do know a CFP & CPA who I asked for advice. So, here she is Kristine McKinley in an interview I did with her and posted in 2008:
Kristine McKinley says…
You definitely have the right idea. If your business income is up this year, then you want to do some year-end tax planning to try to reduce your taxable income for the year.
You basically have two options: you can defer income into the next year, or accelerate expenses into this year.
If you’re not sure how to do that, here are some tips to reduce your taxable income:
if you are self employed, one way to reduce your taxable income is to defer income. You can do this by holding off on billing clients until after 12/31. Or if you were planning a teleclass or a big product or service launch at the end of the year, you could hold off until January.
– Software: I know I’ll need tax software in the next month or so, so I can choose to purchase it in 2008 if I want to accelerate my expenses, or if I think my 2009 income will be higher, I can wait until Jan 1 to buy my software
– Supplies: same concept; any supplies I know I will need for tax season I’m going to buy now to reduce my 2008 income.
– Furniture and equipment: do you need a new computer, an external hard drive for backup purposes, a new chair for your desk?
– Web hosting or domain renewals: do you have any domains that will be expiring soon? Renew them now instead of waiting until they expire.
– Office supplies, shipping supplies, computer supplies: basically stock up on any supplies that you use on a regular basis in your business before the year is over
– Continuing education or classes to improve your business: if you are required to take continuing education, or if you just want to take some classes to help you improve your business, signup and pay for the class before the end of the year so you can deduct it on your 2008 taxes.
– Membership sites: if you’ve been sitting on the fence about joining any membership programs (Shelancers for example), signup before Jan 1 so you can deduct the fees on your current year tax return. Even better, if they offer a lifetime membership fee, choose that option to save money and to take an even larger deduction on your tax return.
– Do you need any work done by web designers, VAs, or other independent contractors? Consider prepaying them for work that you expect them to do in the next 30-60 days. Don’t forget to send them a 1099 if you pay them $600 or more during the year.
– Affiliates: do you usually pay your affiliates on the 5th of the month? Consider sending them their December commissions on 12/31 instead of waiting until Jan 5th.
– Donate to charity: while donations to charity won’t reduce your business income, they will reduce your total income, so consider donating cash, services or goods to your favorite charity before the end of the year
Basically, any expenses that you expect to incur in the next few months that can be accelerated into 2008 will help reduce your taxes for 2008.
One other strategy that every self employed person should consider is funding your retirement account. However, you have a little more time for this strategy as the deadline for most retirement contributions (to IRAs, Roth IRAs, Simple IRAs, etc.) is April 15.
Here are my recommendations for some items you might purchase (based upon my favorite things)…
They are also products that I personally use in my online business.
For when you’re on the go.
- Kindle or Nook – Read and learn on the go.
- iPad. I keep mine in my purse. It’s so much easier than carrying around a laptop.
- Cell Phone. Is it time to upgrade? If your plan expires early next year and you have it as a business expense, you might want to renew early.
- Apps for productivity. Been putting off buying some apps to make you more productive? Now is time.
- mp3 Player – More Learning on the road. (Be sure to load up my podcast.)
- Nice Headphones for your Cell Phone. I love my headset. I can use my cell as an mp3 player while I walk the dogs (and still feel safe because I have my phone on me).
- Good books – just in case you get trapped on a Deserted Island.
- Comfy office chair or a Lazy Boy Recliner for your office.
- Noise Cancellation Headphones. (I have some. They’re weird but wonderful.)
- Premium WordPress plugins
- Premium WordPress Themes
- Hire someone to redesign your blog
Stuff for your Office.
- Desk Pad Calendar. For scheduling and staying organized.
- Day Clock – in case you lose track of time, really badly!
- Big freaking White Board. Did you see mine in my office video?
- Space heater. Again… brrrrr….
- Do your back a favor and upgrade your desk chair
- Better speakers
- Ergonomic keyboard
- New wireless mouse
Camera & Microphones.
- Video camera for recording video.
- Headset with Microphone. For recording tutorials and webinars on your PC.
- Lapel Mics.
- Tripod for recording videos
- Lighting for Videos
- PLR Articles Because you can always use more articles for your blog.
- For business coaches and VA's – Customizable Business Content
- Personalized Twitter T-shirt
- Cool Business Cards. Zazzle has really cool “skinny” & “chubby” sized cards.
Courses to Learn Cool Stuff From.
- NAMS Membership
- Audible.com – I just grabbed an annual account and am loading my phone up with good stuff.
My Latest Course.
- Sticky Content – How to Get More Visibility and Profit from All of Your Content
- Sticky Social Media – How to Stand out and Get More Visibility on Facebook
- New Luggage for traveling to cool Internet Marketing conferences to hang out with me.
- Ticket to NAMS for February.
- Airline tickets
- Autoresponder – if you’ve been putting off this purchase, now’s the time.
- Shopping Cart – Switch to an annual plan and pay for a year in advance.
- Get Organized with your Outsourcing – organize all of your helpers.
- Hire a Virtual Assistant or Copywriter to write press releases, articles, sales pages, or design graphics for you.
- Also, you can go to the Warrior Forum and check out their Special Offers section to find great deals on advertising and copywriting.
Get a Coach
Hire a coach or consultant to come into your business and tweak/refine it to make you more money.
- If you want to get your book published in 2014 – Hire Kristen Eckstein to Coach You
- If you want to work with me, here's where you can find more info – Hire Me
- If you're just getting started out, then I'd recommend that you Work with Kelly McCausey (she is patient and tough)
** Most of the stuff above is tax deductible.
And, of course, you can hire Kristine McKinley (who wrote the article above) to help you with your financial planning (which is another way to spend a bit of cash). She said:
Hope this helps! If you need more ideas I’ve got several posts on my blog about year end tax planning. Here’s my site: http://www.beacon-advisor.com/
Keep more of your money instead of handing it to Uncle Sam.
Best of luck.
PS. Did we miss anything? Let me know!
I appreciate shares and I adore comments! Please share your thoughts.
Heather StoneNovember 25, 2013 at 6:01 pm
Hi there Nicole,
And thanks for sharing this post with the BizSugar community. I think this advice is particularly relevant to entrepreneurs since their incomes will invariably fluctuate. It’s also, as you said, important to consult an accountant first to make sure the purchases you make are appropriate.
NicoleNovember 25, 2013 at 7:59 pm
Yes, the financial rollercoaster that is the entrepreneur’s life – exactly the reason to know your numbers at all times.
Thanks Heather, for stopping by. I appreciate it so much.
Ruthie SpoonemoreNovember 26, 2013 at 2:30 pm
Thanks for the great information Nicole. I’m not “in business” this year, but will definitely use it for my 2013 taxes.
AnthonyDecember 13, 2013 at 3:33 pm
This is the most straightforward advice on tax I have seen in a longtime. Great job on the article. I will definitely be bookmarking this one for reference.
STEVEN J. FROMMDecember 29, 2013 at 10:05 am
Nicole, as to estimates, so long as you use the prior year tax safe harbor rules you will not be penalized no matter how large you liability may be in April. But most people feel uncomfortable knowing they have to come up with or put aside a large amount for taxes. Nowadays since interest rates are so low, prepaying or doubling up on estimated tax payment is the way for many.
As to year end planning, my blog has two articles that may be of value to your readers:
Small Businesses: 8 Great Year-End Tax Planning Tips and Tricks: A Must Read http://frommtaxes.wordpress.com/2013/12/22/tax-planning-small-businesses/ and
2013 Year End Tax Planning Strategies: Learn What Can Be Done Now To Save Taxes and Prevent Costly Mistakes at http://frommtaxes.wordpress.com/2013/10/08/2013-year-end-tax-planning-strategies-learn-what-can-be-done-now-to-save-taxes-and-prevent-costly-mistakes/
Hope this helps your readers and is not considered spamming. Just trying to give readers insights and information.