It’s hard to believe, but 2017 is quickly coming to an end! As you finish your Q4 sprint and get ready for Christmas, it’s time to start thinking ahead toward tax prep in April. Before the year ends, there are some steps you can take to decrease your tax burden, as well as prepare to be more organized 2018.
Taxes are inevitable. The only way to avoid them entirely is to earn $0 in income (or get incredibly creative when it comes to filing!). For most of us, zero income is not a great way to keep food on the table, so consider the strategies below to potentially reduce your taxable income in 2017.
Disclaimer #1 – Please run anything by your own tax advisor before implementing any of these strategies. I’m not a licensed CPA or a tax professional, so the comments below are merely suggestions. Anna Hill is a CPA, however, and was kind enough to look over this post and provide some feedback along the way. If you don’t know who Anna is, you are missing out on a phenomenal accounting resource for online sellers. She operates a free Facebook group and it’s a fantastic place to ask your accounting questions. She also offers some paid courses to help improve your accounting and bookkeeping skills, and you can check those courses out for yourself here:
https://accountingwewillgo.com/courses/ (Anna is incredibly modest and didn’t want me to share the links to her courses, but she took the time to read through this post and offer advice, so it’s the least I could do in return!)
Disclaimer #2 – Many of these strategies involve spending cash now to increase your expenses and potentially lower your taxes. Depending on your tax bracket and your business structure (LLC vs. S-Corp), your marginal tax rate is likely to be in the 40-60% range. If you’re able to take advantage of some of these tax strategies by December 31, you can effectively give yourself a 50% discount on tools or supplies for your business! However, if you don’t have cash available to spend now, PLEASE don’t pull out a credit card and use it irresponsibly just to lock in the tax savings now. If you can’t pay it off in time, the 50% savings will quickly be diminished due to high credit card interest rates and a potential hit on your credit score, so act responsibly!
Stock up on supplies
In most cases, supplies are considered an expense at the time you make the purchase. If you purchase the supplies between now and the end of the year, you’ll get a nice discount on your 2017 taxes. If you wait until January 1 to make the purchases, you won’t see the tax savings until 2018, so plan accordingly! You may not want to purchase 10 years worth of supplies, as that’s probably not the best use of your cash and you may not be able to take a write-off for an excessive purchase, but building a healthy stockpile of common supplies will increase your business expenses and lessen your 2017 taxes. Potential items to stock up on include:
- Shipping boxes
- Packing tape
- Packing materials (dunnage, bubble wrap, etc)
- Scotty Peelers
- Labels for your DYMO or Zebra thermal printer
- Printer ink (seriously, ink can be expensive!)
Invest in your business
In contrast to supplies, larger ticket items may not give you the full write-off in the year you make the purchases. Assets with a longer life expectancy may have to be depreciated or amortized over several years, but you can get at least a portion of the deduction in 2017 if you make the purchase before January 1st. Consult with your CPA to understand which items can be expensed now vs. which ones need to be depreciated over time. As a general rule, if the item in question is under $2,500, you can expense the ENTIRE amount in the year you acquire the asset (thanks to Anna Hill for this piece of info: https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations).
Here are some items you may wish to purchase or upgrade:
- Bluetooth barcode scanner for scouting (most sellers recommend the OPN-2002 or the KDC200)
- USB barcode scanner for listing
- External charger for your scanner or phone
- Label printer (DYMO or Zebra)
- Tracking Spreadsheet – an Amazon accounting system cleverly disguised as a spreadsheet!
Invest in yourself
There’s lots of free information out there, but there are also formal courses and books that can help you grow yourself and your business. If you want to buy any books, eBooks, video courses, or something similar, make the purchase before the end of the year to claim the tax deduction this year rather than waiting a full year to claim it. If you’re in the 50% tax bracket, that $100 course will only cost $50 out of pocket once you file your taxes – Uncle Sam will kick in the additional $50! (As an example, if your business net income is $40k as a single filer, that puts you in the 25% tax bracket, plus 15.3% for self-employment tax, plus ~5% for state taxes, and you’re already up to 45% in taxes!)
Prepay for annual software subscriptions
If you use the cash basis for accounting, paying for a year up front of software subscriptions can allow you to take the entire write off in 2017. Don’t apply this strategy if you don’t have the cash, since ~20% credit card interest is not a wise strategy to save a few bucks on your taxes
Whether you use the cash or accrual basis for accounting, inventory is treated the same for tax purposes. If you purchase $50k of inventory in 2017, and have sold 60% of it, you can only write off $30k in expenses – as Cost Of Goods Sold (COGS). If Uncle Sam let you write off the entire $50k, it’d be smart to go out and spend all of your cash on inventory in December to lower your tax burden as much as possible! Unfortunately, this strategy won’t work for inventory businesses, so don’t bother trying. However, you can apply some strategies to your existing inventory before January 1st. If you have inventory that has tanked in price and/or has been in your inventory for several months and hasn’t sold yet, it may be time to look at disposing or donating of that inventory. If you sell FBA, you can pay Amazon 15 cents per item to dispose of the duds on your behalf. You can of course write off the 15 cent disposal fees, but in addition you can expense the original costs of that inventory into your COGS for 2017. For example, if you dispose of 100 books that cost $150 total, you can write off that $150 as an expense in 2017, saving yourself a decent chunk of change in taxes.
Mileage is perhaps the greatest deduction – as it’s a non-cash deduction. The IRS allows you to take a standard deduction on business mileage that you accumulate throughout the year. In 2017, the rate is 53.5 cents per mile. If you drive 1,000 miles for business throughout the year, for example, you can take a standard deduction of $535. If your vehicle gets 25 miles per gallon, it’ll only require 40 gallons of gas, or around $100 in fuel expense (plus oil changes, maintenance, etc). Writing off the $535 is a nice bonus at the end of the year though, so take the time to go back and map out your larger trips if you haven’t logged them throughout the year. The mileage may help you more than you think! If you’re looking to use an app to track mileage automatically in the background, check out the MileIQ app. Use this link to save 20% on your MileIQ subscription (and give me a gift card to help fund my golf addiction!) – https://www.mileiq.com/invite/VRJNF
Home office deduction
If you work from home, don’t forget about the home office deduction. You can use the simplified option to claim a standard deduction of $5 per square foot of space used exclusively for business (up to 300 square feet). More details are here – don’t forget to include this deduction when you file your taxes:
Prepare for next year
If organization isn’t your strong suit, you may want to prepare for 2018 to make your tax prep a bit simpler for 2019. Set up a separate bank account and/or business credit card, and commit to using that account/card for all business expenses. Then, link that account to a service such as QuickBooks, Mint.com, or WaveApps.com (free dual entry accounting – my personal preference!) to automatically pull in your transactions throughout the year. T his will help you categorize expenses as they happen, and stay ahead of the game!
One final cautionary note
If you run a small business and don’t have “normal” W-2 income, when you go to apply for a mortgage you’ll typically need at least two years’ worth of tax returns to approve you for a loan. If you write off too many expenses and don’t have much net income to show for your work at the end of the year, that’s ideal for tax purposes but may hamper your ability to buy a house. Again, talk to your CPA and come up with a plan that best fits your situation. Bear in mind that there are pros and cons to lowering your net income on paper!