Many small business owners strive to generate a reasonable profit, but this often comes with the challenge of increased tax liabilities. While everyone is responsible for paying taxes, many businesses remain precarious and find it hard to achieve profitability. As we all know, profit can sometimes exist only on paper, not in the bank, making it tough to secure additional funds to pay taxes after battling to stay afloat.
Fortunately, there are some straightforward strategies you can implement to decrease the profit "on the books" while fostering growth. Here are four proactive tips to consider:
1. Prepay for Future Needs.
Start by prepaying for the supplies and goods essential to your product or service. This approach serves two main purposes: it helps lower your initial expenses during an uncertain 2013 and can also secure volume discounts. Additionally, most suppliers typically increase their prices for the coming year. Thus, you save in three ways: through discounts for bulk purchases, by avoiding price hikes, and by reducing taxable income.
Note: Be careful to remember that these costs were paid in December, so you don’t mistakenly feel financially secure when reviewing your January profit and loss statement.
2. Make Advance Tax Payments for Future Credits.
In many cases, businesses can make larger tax payments now to receive credits for the upcoming tax period. If this option isn’t available, a minor, justifiable overpayment in favor of the government usually doesn’t raise concerns. Just ensure that your state doesn’t require amendments to year-end returns, or this strategy won’t be beneficial.
3. Disburse Commissions or Bonuses in December.
If you make quarterly commission or bonus payments based on previous quarter performance, consider issuing a portion of these payments in December rather than January. This will effectively reduce your net profit. To avoid scrutiny, label them as “holiday bonuses” and deduct these amounts from any quarterly bonuses typically given in January. If the bonuses are for work completed in 2012, this practice is entirely legal and presents a generous gesture towards your employees during the holidays.
4. Facilitate Delayed Payments for Shipments.
Due to shipping delays in December, many orders don’t reach customers until January. This can allow some of your preferred clients to make payments for their orders in the new year. If you sell online, you can easily manage sales through payment "posting" dates rather than the actual sale dates. Additionally, consider deferring payments by holding onto deposits and recording them in January, especially if you operate on a cash basis rather than accrual.
