End of Year Business Spending
As the end of the calendar year approaches, many business owners are considering how they can save money on taxes by timing their income and expenses. This basically means moving income into a year of lower taxes and moving expenses into a year of higher taxes. However, this sounds a lot more simple than it actually is. One business’s year-end tax strategy won’t look the same as the next’s. There are many factors to consider. That is why it’s best to work with a tax professional. We were able to get some advice from a few of these experts.
“As a business owner, the end of the year is a pivotal time that can easily be overlooked,” confirmed Ross Reynolds, CPA at SP Group, P.C. “It is vital to have a trusted advisor who can help you make the right decisions when it comes to when and where to spend your money before year-end. You will need to look at the big picture and see if it makes sense to maximize your tax savings this year or possibly move some of those expenses to the next year. Every situation is unique, and while working together, we can help you make the best decision for your business. For example, if you had a lower income year and are going to be paying taxes at a lower rate, it may make sense to delay spending some of those end-of-year dollars until next year when you expect income to be higher, offsetting the tax at a higher rate. An advisor who understands you, your business, and your goals will ultimately guide you to make the correct and most effective decision as the year comes to an end.”
As Ross noted, paying ahead for certain expenses can certainly have its benefits. If there are certain supplies, equipment, or other expenditures that you can reasonably foresee your business needing in the coming year, it may make sense to purchase those before the end of the year to maximize your tax benefit and get those savings now.
“Another form of paying ahead of time could include paying bonuses to your valued employees, which creates both a tax deduction for you and is a benefit for your employees,” Ross suggested.
This is an example of how intricate formulating a year-end tax strategy can be—there is a lot of knowledge required, especially since the 2017 Tax Cuts and Jobs Act, which was the biggest tax reform since 1986.
“There were hundreds of changes made to the tax code for all different types of taxpayers,” Ross explained. “One of the biggest and most notable changes was the inclusion of the Section 199A Qualified Business Income Deduction. In essence, this was a deduction created to promote small business in the United States. It is an extremely complex section of the tax code, but the overall idea is that certain trades or businesses will receive a 20% deduction on their overall business income for years ending after December 31, 2017. There have not been many changes to the deduction from 2018 to 2019, but it is extremely important to have a trusted advisor who has an understanding of both your business and all of the rules and application of this deduction. Two other changes include some more stringent rules on what can be deducted related to meals and entertainment expenses and how certain business assets are depreciated. You are now able to deduct 100% of certain business assets, both new and used, where in previous years you could only deduct 50% of new equipment. The changes to depreciation have provided some of the biggest planning opportunities for many businesses, as you are able to decide with more flexibility how much you want to deduct and when.”
“At SP Group, we pride ourselves on being proactive and ahead of the game, rather than having to react and deal with unpleasant surprises on April 15,” Ross concluded. “We feel our four core values are Relationships, The Power of Team, Life/Work Balance, and Competitiveness. These combined allow us to provide the extra insight necessary to maximize the benefits of year-end planning for you and your business.”
As we continue to explore this topic, don’t lose sight of the importance of smart spending. A good EOY tax-strategy isn’t to spend everything possible to reduce profits. The obvious benefits of paying ahead of time for products/services for the upcoming year is discounted prices, as well as current deductions to taxable income. Also, paying now may also alleviate the temptation to spend your currently available funds on more “fun” but likely unneeded items. If you have no use for the items, then you’re just wasting money. Ask yourself whether your spending is really moving your business forward; if so, it can be a good strategy for reducing your tax bill.
“As a tax advisor, I believe the most important thing to keep in mind is to avoid spending money for the sole purpose of chasing tax deductions,” shared Jonathan Patent with Lutz. “Many taxpayers spend large amounts of money at the end of the year to simply avoid paying income tax. This makes sense for some, assuming the dollars are spent on products/services that will be needed in the future. For example, say a taxpayer knows they have a project that is set to begin early next year that will require a significant investment in new equipment. In this case, purchasing that equipment prior to the close of the year is a great idea. On the contrary, if that same taxpayer had no short-term equipment needs, it may make sense to use those dollars instead to pay down any outstanding debt to save on interest costs. Also, if the current year finished off less profitable than normal, deferring the deductions by delaying end of year spending to next year could mean more return on the investment of those dollars.”
We also asked Jonathan if he has come across any changes within the last year in regards to regulations that affect a business’s taxes deductions.
“With the majority of changes to the tax law stemming from the Tax Cuts and Jobs Act, which already came into play for the tax year 2018, this year may seem slightly uneventful.” Jonathan noted. “The changes to keep in mind in 2019 for most taxpayers are likely a result of certain provisions being indexed for inflation. One such change, albeit quite minor, is the maximum amount that an employee can contribute to their 401(k) plan. The amount in 2019 has increased to $19,000 from $18,500 in 2018. Many other similar changes have the potential to result in tax savings. Just another reason to consult with your tax advisor as we approach the end of the year for most taxpayers.”
“Although paying current income taxes is an understandably unpopular situation, we are currently in a quite taxpayer-friendly climate,” Jonathan added. “With tax law as it exists today, tax rates are lower than they have been for a very long time, especially for business owners. For some, it could make sense to change the thought process and possibly pay some tax today with the expectation that rates will only go up from here. However, that strategy involves assuming the government won’t do something unexpected. That can be a dangerous game to play, as we know that the government is unpredictable.”
Bethany Arnold with Edward Jones believes that by working with your CPA and financial advisor, you can not only find many ways to spend EOY dollars, but you can also find many ways to SAVE IT and to take advantage of the gifts the government has to offer business owners.
“There are multiple avenues available for business owners to save those EOY dollars,” Bethany said. “Business owners with no employees may benefit from an SEP, Owner K, or Owner Defined Benefit Contribution Plan while business owners with employees may benefit from a Simple IRA, a Sake harbor 401(k), or a custom plan option that includes age-weighted, ‘tiered’, and other specialized profit-sharing plans, defined benefit plans, and combinations of these plans, including 401(k).”
“Think of it as ‘paying’ ahead of time for your retirement,” she continued. “As a business owner, you know that your company’s success takes preparation and effort. Your retirement years are no different. The appropriate business retirement plan can incorporate the flexibility you need while helping you to save for your retirement—as well as attract and retain quality employees.”
Bethany encouraged us to look at it this way: In addition to your role as a business owner, you are also an investor: “It just makes good sense to diversify your assets and retirement income so you don’t put your entire retirement nest egg in your business. Saving outside the business means you control your own retirement, rather than depending on the sale of the business to fund your retirement needs. There is no crystal ball that can tell you what your business might be worth when you are to retire. In one scenario, it could be worth only the equipment, building, and inventory, which may not be enough to support your lifestyle in retirement. In fact, often when a business is sold, the owner must finance part of the sale.
Setting up a retirement plan may enable you to benefit from several tax incentives, including a tax credit for a business owner setting up a new plan, tax deductions for making contributions to the plan, pretax salary deferrals, tax deferred growth on the balance inside the plan, and potential tax-free retirement income if ROTH IRA deferrals are made.”
To emphasize how important it is to work with a trusted CPA and/or financial advisor, we spoke to Aaron Newell with AR Solutions.
“Do what you do best and pay for the rest!” Exclaimed Aaron. “Simply meaning, spend your time and efforts in whatever your specialty is and employ a specialist to do the things that you aren’t an expert in. Time is more valuable than money because once it is gone you never get it back!”
AR Solutions is a licensed, bonded, and insured Nebraska Collection Agency with more than 30 combined years in medical collections.
As we’ve learned, $1 spent does not equal $1 worth of tax saved…not even close. There is a lot more that goes into managing your taxes than that! Expenditures correlate into deductions, and businesses should never spend money on things they don’t need just to increase deductions. Something that a lot of small businesses and even some larger companies don’t think they necessarily “need” is a better advertising strategy. You can do awesome work and provide the best services on the market, but if no one knows who you are, what’s the point? That is why marketing your name and your brand in an effective way is so important. We spoke with Amy Ebbeka with Ebbeka Design Co. to learn more.
“Investing in your marketing efforts can be an affordable and smart thing to do with year-end dollars,” Amy stated. “There are many ways to use your end-of-year budget to boost your business and create a stronger brand awareness. Here is my advice:
- Take a close look at your website content, design, and search engine rankings. Is it time to make an improvement? Working with a design or website development firm on your website could be exactly what your business needs to draw in new customers in the upcoming year. We recommend updating your website every 2–3 years to keep things up to date with the latest technology and trends.
- Invest in fresh content for your website. Your blog will help position you as a thought leader in your industry and boost your SEO.
- Develop and schedule your social media efforts for 2020. Sticking to this plan will help keep your online presence more regular as well as remove the stress of worrying about what to post when things get busy in the new year.
Call our Ebbeka Design team if you’d like to set up a meeting to talk about your objectives for your business and find out how to make the most of those year-end dollars.”
A goal of marketing is to make your business stand out. In order to do that, you need to show your consumers that you are real, reachable, and active in the local community. That is what we are all about at Strictly Business. Through press releases, feature stories, and spotlights, we share the accomplishments of local businesses and organizations with our local readership. When your customers see you and your team’s faces as they flip through our magazine, they immediately make a connection that brings humanity back into your advertising.
If you’re hesitant to put your money towards advertising, it might because you think an entire rebrand is necessary or your limited budget won’t get you much so it’s not even worth it. Neither of these are the case.
As Steve Maly, owner of Maly Marketing, put it, “A limited budget doesn’t mean you can’t take a big swing. In an economy that is increasingly reliant on fragmented attention–sometimes you need to try something a little ‘out there’ to get noticed.”
Creative problem solving is Maly Marketing’s specialty. The majority of their clients aren’t dealing with massive budgets, so they’ve found that it helps to look for solutions that are distinctive and resourceful.
Maly Marketing is based in Lincoln, and their team wants to partner with your business to help you create an overall campaign strategy and define your position in the marketplace so you can grow profitably.
One of Maly Marketing’s main values is flexibility, which we find very important as well. Their team knows that times change, and as they change, so do attitudes, media consumption habits, consumer preferences, and available platforms. Those are just a few of the things that a good agency will stay on top of. A good agency is also willing to honestly assess a campaign, look at the data, and optimize and make adjustments.”
One final idea we have for how to use some of your end-of-year dollars is a deep cleaning of your office. If you don’t currently have a janitorial system in place, or even if you do, it would sure feel good to go into the new year with a nice and tidy work space. No job is too large or too small for the team at 360 Clean LLC in Lincoln. They offer their services to any size home or business in the area. From your typical janitorial and maid services to carpet and window cleaning, water removal, waxing hardwood and other hard surface floors, and so much more, 360 Clean give your business the detailing and polishing it needs to be a happy and productive work environment. You may not even have to spend anything to bring 360 Clean to your office! To celebrate their new Lincoln office, they are giving away $25 gift cards to anyone and everyone. Those that use the gift card will get entered into a drawing on January 1 to win a free cleaning!
Business owners need to be smart and creative with any extra income they have available to spend at the end of the year. Work with a professional to get a more complete picture of what your taxable income will look like so that you can see exactly what benefits and tax savings you will receive from paying for certain expenses now. As always, make sure you are reaching out and supporting other local businesses in Lincoln as you work to grow your own!