Some deductions are under your control because you can decide whether to incur the expenditure. Also, sometimes you are permitted to make tax elections on when to report income or when to claim write-offs. Here are some pointers that can help you minimize your income and maximize your deductions. Or, you can follow the reverse strategy if you already have losses for the year and want to accelerate income to offset those losses (and defer deductions).
- Cash-basis businesses. If you account for your expenses and income on a cash basis, you can influence when you receive income and claim deductions for year-end items. For example, you can delay billing out for services or merchandise so that payment will be received in the following year. In deferring income for services or goods sold, do not delay billing so that collection may be in jeopardy. Also factor in your tax bracket for this year and the bracket you expect to be in next year. If you will be in a higher tax bracket next year because your income will be greater or because of tax law changes, you may not want to defer income. You may prefer to bill and collect as soon as possible to report the income in the lower-tax year.
On the flip side, you can accelerate deductions by paying outstanding bills and stocking up on supplies. Again, determine whether accelerating deductions makes sense for you.
However, in accelerating deductions, do not prepay expenses that relate to items extending beyond ...