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Tax strategy: accelerate or defer income, expenses

Jay Parks

November 7, 2017

Heading into the end of the year, you want to make sure that you manage your income tax liability. One way to do that is by accelerating expenses.

Take a look to see what you can prepay, how you can prepay it, and what you can afford. For example, I’ll prepay my insurance. I’ll prepay my utilities. I’ll prepay some rent. I’ll make sure that my last payroll of the year is not on Jan. 1 but on Dec. 31.

Even if you would typically do payroll on Jan. 1, consider moving it to Dec. 31. The only difference between paying on Dec. 31 and Jan. 1 is that paying on Dec. 31 allows you to deduct that payroll as an expense for this year. I always choose to accelerate my payroll and move it up by a day.

With real estate taxes, you can pay half of them at the end of December and half in March. Pay on or before Dec. 31 so you can claim that expense on your 2017 tax return.

The word “pay” is a little slippery, which we can use to our benefit as a tax-planning maneuver. The IRS considers a check written on or before Dec. 31 to have been paid within the year—in this case 2017—if it clears by March 15 of the following year. That gives 75 days for the check to clear.

Let me give an example. Let’s say I write a utility check on Dec. 31, 2017, and the city deposits it on Jan. 10. I can still deduct it in 2017 because the check is dated in 2017, and it cleared before March 15.

My rule of thumb is to prepay within the next several months for things you know you’re going to pay anyway.

Contributions to organizations are one example. So are utilities, insurance, and supplies—paper, pens, and writing pads. Go buy 50 boxes of pens because that’s what you’re going to need over the course of a year. And don’t forget your internet service and your cellphone bill.

On the other hand, use common sense. If you own a restaurant, obviously you don’t want to buy a three-week supply of salad, because it’s not going to last. But you can certainly buy enough salt or pepper or cups or napkins for three weeks, because they’re not going to go bad in that time period.

This strategy applies to businesses that are cash-based for accounting purposes (in contrast to accrual-based), which is true of almost all small businesses in America. That means that when dead presidents hit the table, you have income. When dead presidents leave the table, you have expense.

I use the terms dead presidents because people remember it. It’s the truth. George Washington is dead. I hate to tell you. It’s sad, and I miss him, but he’s a dead president.

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