Follow These 3 Savvy End-of-Year Tax Tips

Once I became a business owner, I developed a curious obsession for paying as little in taxes as possible. Despite knowing better, I’d find myself scrambling toward the end of each year to buy a bunch of extra crap (even a new car!) that I didn’t really need, all to maximize my business expenses and reduce my taxable income.

But buying a new MacBook, redecorating my office or taking advantage of a loophole in the tax code by wasting $70,000 on an SUV is not a smart financial move -- even if that SUV would save me $25,000 in taxes. It was all wasteful spending and, frankly, an embarrassment to my image as a self-proclaimed financial guru. So I came to my senses, stopped spending my way to lower taxes, and researched wiser ways to reduce what I owed Uncle Sam. I’m sharing this all now, just after you’ve filed your third-quarter taxes, so you have time to be proactive instead of reactive when reducing your tax hit in a few months.

Here’s what I found.

Easy: Do a January-December swap.

As you approach the end of the year, be strategic about your income and expenses. You may want to wait until January 2 to deposit earnings, or bump up paying January’s bills during the last week in December. Why? If you’re on the brink of moving into a higher tax bracket (or worse, the alternative minimum tax), some simple, smart decisions could keep you on the lower rung -- or, in the case of being several thousand dollars over the threshold, push you back down.

Intermediate: Turn your LLC into a virtual S Corp.

If you operate your biz as an LLC, filing two simple forms could save you thousands. Let’s say your business is on track to earn $200,000 this year. Given your current structure, be prepared to cough up an extra $30,600 on top of your state and federal income tax -- because as an LLC, 100 percent of your earnings is subject to a 15.3 percent employment tax (a.k.a. FICA). But if you file IRS Forms 8832 and 2553, you can remain an LLC but be taxed as an S Corp. This means that only your salary (let’s say it’s $75,000) is subject to this employment tax. The remaining $125,000 will then be considered an owner’s distribution or dividend, which isn’t taxed for FICA. That just saved you $19,125.

Related Book: The Tax and Legal Playbook by Mark J. Kohler | Amazon | eBooks.com | Barnes & Noble

Expert: Be creative with retirement plans.

Sure, SEP IRAs and solo 401(k)s are good retirement vehicles for the average entrepreneur, but if you really want to save big on taxes, consider setting up your own defined benefit and pension plan alongside a Safe Harbor 401(k). This helped a business owner I know reduce his tax bill on a million in earnings down to $400,000 in earnings. That other $600,000? More than $450,000 went into his personal retirement account. (His employees’ retirement accounts got the rest.) Work with your tax accountant and wealth adviser to set up one for yourself.