Take Expenses Now To Limit Your 2007 Business Taxes

By Richard Chapo

As we roll towards the end of 2007, you are probably thinking about the holidays and gifts you need to buy. Well, it is also time to give yourself a tax gift.

Take a moment to think back to last April. Do you remember the anguish of writing a check to the Internal Revenue Service? Did it seem a bit more than it should have been? Did you have to scramble to put together the funds? If you do not recall, go check the ledger in your check book or your accounting system. Bring back bad memories? If you want to avoid this situation again, you need to start following the simplest of tax strategies.

A time-tested and incredibly effective tax strategy is expensing everything you possible can before the end of the year. Now, the expenses need to be legitimate, but you can do some serious positive damage to your tax bill next year if you take this step. Remember, legitimate business expenses reduce your gross profit, which results in a reduction of your tax bill.

Most small businesses have a very interesting balance sheet around the end of December each year. If you took a look at it, you would think the company was nearly bankrupt. Why? A business that plans ahead will use all available cash to pay for expenses in an effort to “buy down” their profit. A company that otherwise might show a $100,000 profit for the year suddenly shows a $10,000 profit. Of course, it may also have a bevy of new equipment, office supplies and so on.

So, what areas should you focus on? Well, every business is different, so you need to consider the nature of yours. Try to focus on expenses you know will come up in January and February of next year. This can be the most basic of things such as office supplies to more complex expenditures like new office equipment. Make a list of these items and determine what you can buy now instead of next year. Importantly, make sure you understand how much cash you will need in January so you don’t have cash flow problems if you over expense.

If you want to limit the damage of your tax bill in April, the time to act is now. Taking such action is like giving yourself a nice gift, but you have to wait till April to open it.