If your business operates as a regular C corporation, corporate tax rates for 2017 are currently scheduled to be the same — IF the new Congress makes no tax law changes. With an expectation that your corporation will pay the same or lower rate in 2017, you should plan to defer corporate income into next year and accelerate deductible expenditures into this year. If you expect the opposite, accelerate income into this year, while postponing deductible expenditures until next year.
Looking for easy ways to defer income and accelerate deductible expenditures? If your small business uses cash-method accounting for tax purposes, it can provide flexibility to manage your 2016 and 2017 taxable income to minimize taxes over the two-year period. Here are four specific cash-method moves if you expect business income to be taxed at the same or lower rates next year:
- Before year end, charge on your credit cards recurring expenses that you would otherwise pay early next year. You can claim 2016 deductions even though the credit card bills won’t be paid until next year. However, this favorable treatment doesn’t apply to store revolving charge accounts. For example, you can’t deduct business expenses charged to your Sears or Home Depot account until you actually pay the bill.
- Pay expenses with checks and mail them a few days before year end. The tax rules say you can deduct the expenses in the year you mail the checks, even though they won’t be cashed or deposited until early next year. For big-ticket expenses, send checks via registered or certified mail. That way, you can prove they were mailed this year.
- Prepay some expenses for next year, as long as the economic benefit from the prepayment doesn’t extend beyond the earlier of: 1) 12 months after the first date on which your business realizes the benefit, or 2) the end of 2017 (the tax year following the year in which the payment is made). For example, this rule allows you to claim 2016 deductions for prepaying the first three months of next year’s office rent or prepaying the premium for property insurance coverage for the first half of next year.
- On the income side, the general rule for cash-basis taxpayers is that you don’t have to report income until the year you receive cash or checks in hand or through the mail. To take advantage of this rule, hold off sending out some invoices at year end. That way, you won’t get paid until early next year. Of course, you should never do this if it raises the risk of not collecting the cash.
When should you take the opposite approach? If you expect to pay a significantly higher tax rate on next year’s business income, try to use the opposite strategies to raise this year’s taxable income and lower next year’s. Be sure to factor into the equation your expectations about how the election results will affect taxes in future years. We discuss that here and will have more posts on the topic very soon.