Business Tax Strategies: What Works and What Doesn’t

It’s mid-December and time for Solopreneurs and all independently employed professionals to think about how much money we’ll hand over to the taxman this year. Tax planning is usually at top of mind as the year ends but be advised that obsessing over taxes is not always useful. New York City CPA and small business tax specialist Michael Hanley recommends that you pause and carefully evaluate the impact that aggressive tax strategies would have on your financial circumstances.

Hanley cautions small business owners and Solopreneurs against inflated spending on business expenses in order to lower the tax bill because deductions are not a dollar-for-dollar benefit. Every dollar is written off as a deduction yields on average only 30 cents in tax savings (depending on your tax bracket and legal structure of the business). If you have a big-ticket item to buy and you anticipate that this year’s income and next years will be about the same, then buy when you can get the best price on the item, be it this year or next. Your savings could be worth more than the deduction.

Hanley also addresses the apparently common tactic of zeroing out one’s business bank account by December 31. Paying for business expenses, adding to your retirement account, or purchasing business equipment or supplies might make the zero bank account balance tactic work. Paying yourself a bonus, taking a shareholder distribution if your business is a corporate entity, paying down your credit line at the bank, or paying off business credit cards will not give you legitimate deductions.

Professional development education is tax-deductible, so if you’re holding money and there is a potentially useful workshop or symposium offered late in the year or early in the new year, do register and pay on or before December 31. Adding a certification to your CV can make your services appear more valuable to clients and might also justify an increase in your hourly rate and project fee.

You might also consider throwing a holiday party for clients, prospective clients, referral sources and selected business colleagues (meaning, no one who might steal a client!). The party expenses will be tax-deductible and best of all, it could turn out to be a networking bonanza that creates billable hours for you in the coming year and beyond.

Clients and referral sources could come away with more business as well and that will make their relationship with you more valuable to them. If you can grab a big table or a private room in a restaurant that needn’t be fancy, but has a good reputation, then plan your party and use Evite for the invitation and RSVP. Allow 7-10 days for the replies— last-minute invitations can be just fine. Spontaneity has its charms, especially at this time of year.

Invite 30 guests and expect 10 to show. Set out five or six finger foods and arrange for a signature cocktail. If someone asks for beer or wine, let them have it. Your party can run from 6:00 PM – 8:00 PM. Most people will have two drinks, the restaurant will tell you how much food to set out. You will probably spend $60/pp, meaning that a table of 10 will cost about $750.

You might also consider holding a party for your Linked-In connections. It would be a wonderful way to introduce your colleagues to one another and billable hours could be created as a result. You may 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 on 25 showing up.

If it’s too late to host a party this year, the cards and stamps used for the December greetings that you’ll send to clients and referral sources are tax-deductible. Furthermore, if certain clients have given you a generous amount of billable hours, perhaps with an ongoing retainer, then send those clients a gift. Confirm with the HR department of the company that corporate gifts are allowed and if there is a maximum gift amount. The gift will enhance the relationship and it is tax-deductible as well.

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