Business Tax Strategies: What Works and What Doesn’t
It’s mid-December and it’s time for Solopreneurs and all freelancers to think about how much money we’ll give to the tax collector this year. Tax planning is often a priority as the year winds down, but keep in mind that obsessing over taxes isn’t always helpful. New York City small business tax specialist and CPA Michael Hanley recommends that you pause and carefully assess the impact aggressive tax strategies would have on your financial circumstances.
Hanley cautions small business owners and Solopreneurs against inflating spending on business expenses to lower the tax bill, because the deductions are not a dollar-for-dollar benefit. Each dollar written off as a deduction produces on average only 30 cents in tax savings (depending on your tax bracket and the legal structure of the business). If you have an expensive item to buy and anticipate that your income this year and next will be about the same, buy when you can get the best price on the item, either this year or next. Your savings could be worth more than the deduction.
Hanley also addresses the seemingly common tactic of zeroing out the business bank account by December 31st. Paying for business expenses, adding to your retirement account, or buying business equipment or supplies could make the zero bank account balance tactic work. Paying yourself a bonus, receiving a shareholder distribution if your business is a corporate entity, paying off your line of credit at the bank, or paying off business credit cards will not give you legitimate deductions.
Professional development education is tax deductible, so if you have money and a potentially useful workshop or symposium is offered late in the year or early in the new year, register and pay on or before December 31st. Adding a certification to your CV can make your services seem more valuable to clients and may also justify an increase in your hourly rate and project fee.
You might also consider hosting a holiday party for select clients, potential clients, referral sources, and business colleagues (ie, no one who might steal a client!). The party expenses will be tax-deductible, and best of all, it could turn into a networking bonanza that generates billable hours for you in the coming year and beyond.
Customers and referral sources could also get you more business, making their relationship with you more valuable to them. If you can occupy a large table or a private room at a restaurant that doesn’t have to be fancy, but has a good reputation, plan your party and use Avoid for the invitation and RSVP. Please allow 7-10 days for responses; last-minute invites may be fine. Spontaneity has its charms, especially at this time of year.
Invite 30 guests and expect 10 to show up. Prepare five or six sandwiches and host a signature cocktail party. If someone orders beer or wine, let them. Your party can take place from 6:00 pm to 8:00 pm Most people will have two drinks, the restaurant will tell you how much food to prepare. You’ll probably spend $60 per person, which means a table of 10 will cost around $750.
You might also consider hosting a party for your Linked-In connections. It would be a wonderful way to introduce your colleagues to each other and billable hours could be created as a result. You might want to make this a pizza, salad, beer, and wine affair, but so what? It’s a great idea, regardless. If you have 100 connections, plan for 25 to show up.
If it’s too late to throw a party this year, the cards and stamps used for December greetings that you’ll send out to clients and referral sources are tax deductible. Also, if certain clients have given you a generous number of billable hours, perhaps with a rolling retainer, then send those clients a gift. Confirm with the company’s human resources department that corporate gifts are allowed and if there is a maximum number of gifts. The gift will enhance the relationship and is also tax deductible.
Thank you for reading,
Kim