If you’re going to invest in new equipment or services for your business, the timing of those purchases can affect your tax liability this year or next year, said Milkwick. Starting in January, plan out what you’re willing to invest in before the end of the year.
“If it’s November, and you’re planning on purchasing equipment within the next several months for a business expansion, for example, it may make sense to accelerate the purchase … before the end of the year to get the tax deduction in the current year,” Milkwick told Business News Daily. “[The] same goes for services. If it’s toward the end of the year, and you’re planning on a large marketing campaign over the next several months, it may make sense to prepay for some of the costs to take the deduction in the current year.”
Happen to have spare cash to make bigger investments? Be sure to consider tax-friendly opportunities. For example, you can write off a significant portion of initial investments in areas like real estate and oil and gas, said Casey Minshew, CEO of EnergyFunders.
“Oil and gas investments that pass through ‘intangible drilling costs’ help reduce an investor’s taxable income, as they can take these costs as active deductions against their earned income,” Minshew said. “This can generate up to a first-year return of 30% based on tax benefits alone, even before a drop of oil has been produced.”
Business owners often mistakenly think that all cash inflows are taxable income and all cash outflows are deductions, Milkwick said. In reality, the nature of cash inflow or outflow determines whether it can be taxed or deducted.
For example, he said, income from the sale of the business’s goods or services is taxable. However, some common cash increases that aren’t taxable to the company include bank loans, lines of credit and loans from the owner to the business.
“These [loans] are also not deductible to the owner until the business spends the money,” Milkwick added.
If you’re not sure whether you can or should use any tax deduction strategies, consult with your tax attorney or certified public accountant (CPA).