Ways 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 …
“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 2008. Your quarterly taxes that you pay in 2009 might be then set at $2000 every 3 months. ($8000 for the year)
- Now, what if you made $60,000 in 2009 – 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.
Lynn Terry of ClickNewz.com says:
I make some of my biggest buys in the 4th quarter. This is when I purchase new computers, office equipment and supplies, office furniture, new toys like: video camera, photo printer, microphone, iPad, etc. I also book in advance for business trips I'll be taking in the first quarter. Often you'll get better deals by pre-paying for your hotel anyway.
It's also a great time of year to make advertising buys for the New Year. You get the double benefit of the tax deduction this year, and the exposure and traffic next year – which helps you increase your income even more in the New Year so you can have that dreaded task of spending it on fun new gadgets! 🙂
Ronnie Nijmeh of PLR.me (< -click for a free offer from Ronnie) says:
I've actually been spending the greater part of November and December trying to figure this out myself. 🙂
Firstly, I've been making some larger purchases. So things like a new printer, marketing training, software, big gifts for staff, and so on.
But the biggest thing I've been doing is spending a ton on projects that have been on the back burner for a while, things like revamping my site, having custom coding projects done, new tools and resources for my clients, and big advertising spends.
Essentially, I've been toying with the strategy of spending money today, then reaping the benefits early in the new year, that way the expense occurs in 2010, but the reward just a few short weeks later in 2011, taxes are lower, and it's a win-win
Shannon Cherry of S.A.L.E.S. System Formula says:
I owe. I owe. So it's time to get rid of some dough!
Every year (around Thanksgiving in the US) I know I'll need to ‘spend down' a little. I use this money to reward myself for working hard during the year. Usually, that's fun equipment. Toys like video cameras, new monitors, etc.
This year, however, I took a long, hard look at what skills I was lacking that would improve my business. And I decided to invest in classes. I'm currently taking an enrollment class. I also invested in a PDF rebrander. And of course, some books:
- Chases Calendar of Events 2011
- AP Stylebook
- Writer's Market 2011
I probably need to spend some more… hmmm… maybe an iPad, if Santa hasn't gotten me one already!
Nicole Dean of .. here! .. says:
Hey guys! I posted about this topic two years ago, and had my friend, who is a financial adviser help, too.
So, I'll resurrect that blog post because it contains some really good tips.
Here it is…
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 this 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.
Last year, 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.
- mp3 Player – More Learning on the road. (Be sure to load up my podcast.)
- Cell Phone.
- Headset 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 good about having my phone on me).
- iPad. I keep mine in my purse. It’s so much easier than carrying around a laptop.
- 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.)
- 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!
- Demotivators. (You probably saw those in my home office.)
- Big freaking White Board. Did you see mine in my office video?
- Space heater. Again… brrrrr….
Camera & Microphones.
- Flip Mino Cam. For video marketing.
- Headset with Microphone. For recording tutorials and webinars on your PC.
- PLR Articles Because you can always use more articles for your blog.
- Personalized Twitter T-shirt
- Cool Business Cards. Zazzle has really cool “skinny” & “chubby” sized cards.
Courses to Learn Cool Stuff From.
- Traffic Dashboard.
- Easy Link Love.
- MomMasterminds Annual Membership. This is a great program for Moms and I recommend it for anyone looking for assistance in their online business.
- Luggage for traveling to cool Internet Marketing conferences to hang out with me.
- Ticket to NAMS for August.
- 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.
- Roboform – to be more efficient in 2011
- Hire a Shelancer 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.
** Most of the stuff above is tax deductible.
And, of course, you can hire Kristine 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.
I appreciate shares and I adore comments! Please share your thoughts.
LorettaDecember 22, 2010 at 10:16 pm
This is good information to have noted and check out during the year, especially since we all plan to double our income in the new year 😉 It’s good to be prepared.
GlennetteDecember 23, 2010 at 9:16 am
Great list Nicole! i didn’t see “Donate to charity” on it though and that’s a Win Win.
One other thing I do. I use my Amex card for most purchases so I usually login on 12/30 or 12/31 and pay it off. Technically it counts in the year charged even if you haven’t paid it yet (Disclaimer: I have a BA in Accounting but I’m not a CPA) but I like to actually pay the expenses in the year that I incurred them and start the year fresh. :o)