- Small business owners: Get ready to pay taxes on Jan. 15.
- This year, save up to $54,000 in a retirement plan.
If you're an entrepreneur, you're running out of time to reduce your 2017 tax bill.
That means it's time to whip out your receipts, review any upcoming payments and fund your retirement plans.
"For small business owners, accelerating deductions and deferring income is almost always part of year-end tax planning," said Gavin Morrissey, managing partner at Financial Strategy Associates in Needham, Massachusetts.
Only time will tell which elements of the House and Senate's tax bills will become law — and what effect that will have on tried-and-true strategies.
"We don't know what deferring income and accelerating expenses will do to them in 2018," Morrissey said.
But at least entrepreneurs have some certainty for finishing up this year. Here are a few steps you can take to wrap up your books for 2017.
In a perfect world, entrepreneurs would pay their estimated state and federal taxes, including Social Security and Medicare levies, four times a year.
Since quarterly taxes for the final three months of 2017 are due on Jan. 15, 2018, take the time to make sure you've properly deducted the levies and that you're accounting for any late fees and penalties the IRS may impose if you missed a payment.
Watch: Who stands to lose in the GOP tax bill?
Working with a payroll company can also help you simplify things.
"Let's say you were supposed to pay $10,000 throughout the year," said Dave Burton, a certified public accountant at Burton & Co. in New York. "You can go to the payroll provider, have them deduct the $10,000 and pay it to the IRS as additional withholding."
Once you've determined what you owe in taxes, think about how you can save.
While most folks may know that a 401(k) or an IRA will allow you to save on a tax-deferred basis, did you know that you can also save on taxes by setting up a retirement plan? Contributions you make as an employer to a SIMPLE IRA, a SEP IRA, or a solo 401(k) are tax deductible.
Be aware of the differences between these three retirement plans. If you are your own boss with a SIMPLE IRA, you can save up to $12,500, plus a catch-up contribution of $3,000 if you're 50 and older. You can also contribute either a 2 percent fixed contribution or a 3 percent match as the employer.
You can save even more aggressively in a SEP IRA and a solo 401(k).
Because you're the employer and the employee of your small business, you can save up to the overall limit for defined contribution plans: 25 percent of your earnings, up to $54,000 in 2017, plus a $6,000 for catch-up contribution if you're 50 and older. That $54,000 includes the $18,000 maximum you can defer into a plan as an employee, as well as other employer contributions and matches.
Watch this space: While the House proposal won't keep you from saving for retirement, the Senate bill has an amendment that would permit workers over age 50 to make a catch-up contribution of up to $9,000. Those contributions would go toward a Roth account, meaning you would pay taxes upfront.
Talk to your advisor or your accountant to determine which of these plans is right for your business.
Depending on how your clients pay, you may be able to defer receipt of income this year, which could help you save on taxes.
Many sole proprietors use cash basis accounting, meaning you report income when you receive payment. Consider scheduling your billing so that clients pay you in early 2018 for work you performed in late 2017. This way, you receive the money in the new year.
On the other hand, if you had a particularly successful year, you can try to accelerate deductible expenses. Whether you choose to hold off on recognizing income or you want to incur costs in these last few weeks will depend on whether you're comfortable with these changes to your cash flow.
The jury is still out on what deferring income into 2018 might mean for you and your alternative minimum tax or AMT – or whether this levy will be around anymore.
The AMT requires certain high-income filers to calculate their tax liability twice: once under the ordinary tax framework and again under the AMT, which does away with many deductions. These filers then owe the higher of the two.
"The AMT is a wildcard," said Morrissey. "We know the 2017 rules, but until the bills become law, we have a hard time saying that this is what you should do now."
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