Taxes are an expense that eats into cash flow. However, smart planning can optimize tax opportunities to minimize the imact on your cash flow.
Here are three tax strategies that could help you from becoming cash-strapped during tax time.
Finance equipment purchases
Generous tax write-offs, such as bonus depreciation and first-year expensing, can be used when your business acquires machinery, furniture and other equipment, even if the purchase is financed in whole or in part. Payments made after the year of purchase help to improve cash flow because the tax benefits are claimed now while the cost of the equipment is made later on.
For example, if you purchased equipment late in 2011 that cost $60,000 and which you are paying off now, check to see which tax write-off (100 percent bonus depreciation or first-year expensing up to $500,000) can be used. If you are in the 25 percent tax bracket, a full write-off effectively saves you $15,000 in taxes (cash that you didn’t have to spend). You get the tax savings and you have not yet fully paid for the item that generated those savings.
For 2012, consider using this strategy if your business needs new or additional items. Check write-off rules for this year, which are set to be less generous for equipment purchases unless Congress extends the 2011 favorable rules for 2012.