As a small business owner, you’re always looking for ways to save money on taxes. Here are two simple yet effective strategies that can help you reduce your tax burden while staying on the right side of the IRS.
1. Prepay Expenses Using the IRS Safe Harbor Rule
Did you know that the IRS actually allows you to deduct certain expenses in advance? It’s true! This helpful provision is called the “safe harbor rule,” and it can be a great way to lower your taxable income for the current year. Here’s how it works:
- If you’re a cash-basis taxpayer, you can prepay and deduct qualifying expenses up to 12 months in advance.
- Eligible expenses include rent, lease payments on business vehicles, and insurance premiums.
- The key is that you can’t prepay for more than 12 months or into the year after next.
For example, let’s say you pay $3,000 a month in rent for your office space. On December 31, 2024, you could write a check for $36,000 to cover all of your rent for 2025. Even if your landlord doesn’t receive the check until January 2, 2025, you can still deduct the full $36,000 on your 2024 taxes. This strategy benefits both you and your landlord. You get a larger deduction for the current year, while your landlord receives a full year’s rent in advance, reducing their collection worries. Please note: only write checks for money or credit that you currently have access to. If you are unfamiliar with the Safe Harbor rule, check out our article: What Does Being in Safe Harbor Mean?
2. Delay Billing Until the New Year
Another straightforward way to reduce your taxable income for the current year is to hold off on sending bills to your customers, clients, or patients until after December 31.
This strategy works well if you or your business operates on a cash basis and follows the calendar year. Remember, most customers and insurance companies don’t pay until they receive a bill. By delaying your billing, you can effectively postpone some of your income to the following tax year.
Here’s a practical example: Jake, a dentist, typically bills his patients and insurance companies at the end of each week. This year, he decides not to send any bills in December. Instead, he waits until the first week of January to send out all those December bills. By doing this, Jake has successfully moved his December 2024 income into the 2025 tax year. These strategies can be powerful tools for managing your tax liability. However, it’s always wise to consult with a qualified tax professional to ensure these methods align with your specific business situation and comply with current tax laws.
Remember, smart tax planning isn’t about avoiding taxes—it’s about making informed decisions that benefit your business while following and utilizing all the rules set by the IRS.
Your Trusted Partner in Business Success
At Plack Group, we specialize in empowering small to midsized businesses with our team of expert tax accountants, consultants, and CPAs. Our decades of experience have enabled us to help countless business owners:
- Uncover little-known tax deductions
- Maximize wealth accumulation
- Increase profitability
- Stress-less about their complicated taxes
We believe in helping you work on your business, not in it. As your trusted Bel Air, MD tax accounting partners, we deliver unparalleled service excellence. Our goal is to alleviate the stress of financial management, allowing you to focus on what you do best – running your business. With Plack Group handling your taxes and financial strategies, you can rest assured that your business is positioned for success. Let us partner with you to steer your company towards its goals.
