Holiday balance

Christmas and the New Year’s holiday time can be an obstacle to year-end tax planning.

Think about it.

Tax planning takes time and energy. The holidays compete for this same time and same energy a person needs to structure their financial and business affairs to reduce their income taxes before the year ends. Christmas requires great chunks of time to attend parties, shop for gifts, prepare Christmas dinner, and to put up and take down Christmas decorations.

And stress. What a great energy zapper.

Think of the energy spent just stressing over the decision of which gift to get your spouse and whether or not you are spending too much or too little money? So which comes first, enjoying the holidays with your friends and family or hiding out alone in your office contemplating your 2011 income taxes?

Christmas will always come first. It does for me. The result is very little time and energy is left for year-end tax planning. But keep in mind that you spend a lot more money for income taxes than you spend for Christmas. So it is prudent for you to spend some time considering last minute tax moves. Who knows? You might be fortunate enough to pay for Christmas with your income tax savings. If you do find yourself short of energy and time due to Christmas, at least consider this one strategy. See if you can defer any 2011’s income into 2012 and accelerate deductions from 2012 into 2011.

Income tax rates for 2011 and 2012 are the same. By shifting taxable income into 2012 the income will be taxed at the same rate as 2011 but you defer paying the income tax for a year. (A note of caution: If you expect to be in a lower tax bracket in 2012 as compared to 2011, deferring income and accelerating expenses might not be the strategy for you.)

You can defer income into 2012 several ways. Virtually all individuals and most small businesses are “cash basis” taxpayers. This means income is recognized when received; deductions are recognized when expenses are paid. If you own a business, the most obvious way to defer income into 2012 is to hold off billing your customer, patient, or client so that no payment for your product or service will be received in 2011.

As an employee you might ask your boss to wait and pay any year-end bonuses in January. Farmers can wait to sell their cattle or crops until next year. It’s the same thing for investors. If you have stocks, bonds, or other property with gains you might consider waiting until 2012 to cash in on those gains.

The opposite side of the equation of deferring income into 2012 would be to accelerate expenses normally paid in 2012 into 2011. If, again, you’re a business owner on a cash basis of accounting, you can accelerate expenses simply by paying all invoices that you’ve received before December 31. And let’s distinguish between expenses from principal payments on debt. Expenses are deductible principal payments toward notes payable are not. There is no advantage to paying bank debt early except for the interest expense portion of the debt.

You might also look to discretionary expenses such as repairs and maintenance that could be completed and paid for in 2011 rather than waiting until next year. Certain expenses such as feed for cattle or insurance premiums can be prepaid. And as discussed in previous commentaries, with generous bonus depreciation and section 179 deductions available in 2011, this is a good year to buy capital equipment for your business.

If you are not in business for yourself, by accelerating payments for items such as medical expenses, state income taxes, charitable contributions, mortgage interest payments, and employee business expenses might decrease your 2011 income taxes by allowing you to itemize your deductions or to increase the amount of itemized deductions you can claim. If you find yourself short of funds you can charge these deductions to your credit card before Dec. 31 and receive credit for paying them in 2011 even though you may pay your credit card next year.

If you’ve ever attempted to prepare your own income tax return, you know that income tax is a difficult subject. Even a simple concept such as “defer your income and accelerate you deductions” can be difficult to apply appropriately.

Depending on your level of knowledge and confidence, don’t be afraid to ask a professional for help.

About Potts
David Potts is a certified public accountant also accredited in business valuation. Owner of Potts & Company, Certified Public Accountants for more than 25 years, his practice focuses on small and medium size businesses and their owners in the areas of taxation, accounting and bookkeeping, business valuation and business advisory services. He is a Fort Smith native and a graduate of the University of Arkansas. You can follow more of his thoughts at ThePottsReport.com. Although every effort is made to provide you accurate and timely tax information, it is general in nature and not specific to your facts and circumstances. Consult a qualified tax professional to discuss your particular case.

Also, feel free to e-mail topic suggestions or questions to [email protected]