While most people circle April 30 as the most important tax deadline on their calendar, if you operate a business the more pressing date is Dec. 31, just three months away.
Dec. 31 is the deadline to make personal deductions count in this tax year. If you are a sole proprietor, it’s also your year-end date and a deadline for important business decisions. If you are incorporated, then your year-end date is your business-critical deadline.
Effective tax planning requires a three- to six-month cushion so you have time to take advantage of every opportunity for tax savings.
If your accountant advises you to buy a new truck, don’t go out and lease one. Purchasing and leasing have totally different effects on your tax planning.
Right now, we’re reviewing our clients’ first nine months of operation and preparing tax estimates so they’ll have peace of mind and cash flow when their returns are due. We’re also talking to them about tax strategies for expenses prior to the end of the year.
Make a big purchase
If you’re planning a major purchase, consider doing so before Dec. 31.
There’s an advantage to loading up on deductible expenses in a high-income year. Spending $3,000 on tires in December could save you $900 owed to Canada Revenue Agency (CRA) when you file your 2019 tax return this April. Buying those tires in February 2020 will delay your savings until April 2021.
Make a really big purchase
There’s a rule of thumb in accounting that says the best time to acquire new equipment is at the end of your tax year. It’s generally true as long as you’re financing the vehicle with a loan and not a lease.
That’s because CRA lets you expense a half-year’s depreciation on the asset purchase even though you may have only owned it for a month or two. Since CRA allows a 20% depreciation expense during a truck’s first year, that’s a good chunk of change on a new vehicle. You could be writing off far more than you actually paid out during the short time you’ve had it.
Leasing a new asset close to year-end doesn’t offer the same tax-related benefit. That big initial lease payment is considered to be a pre-paid deposit which you cannot expense all at once. You have to divide it by the number of months in your lease contract and expense that amount each month in addition to your regular lease payment.
People in trucking tend to use the words “buying” and “leasing” interchangeably. If your accountant advises you to buy a new truck, don’t go out and lease one. Purchasing and leasing have totally different effects on your tax planning.
Any time you pay to borrow money, and that money is used to help you earn business income or provide working capital, the expense is tax-deductible. This includes interest paid on the business portion of credit cards, lines of credit, loans, the cost to set up and manage loans, and any fees for related legal, accounting, and bookkeeping services.
Loan-related expenses aren’t like most business expenses. Interest and other fees may be amortized over the life of the loan and wrapped into monthly payments. Up-front administrative or documentation fees may be buried in the fine print.
Medical expenses are deductible when they’re paid, not incurred. Plus, there is a medical expense cap that allows you to only claim expenses greater than 3% of your net annual income. If your kid needs braces it may be better to do it now and pay as much of it as you can before Dec. 31 in order to make sure your medical expense exceeds that 3% threshold. Paying a portion this year and another next year may mean that as a percentage of your income your medical expense is too low to qualify for a tax deduction.
No one wants to pay more tax than they have to, so don’t wait until it’s too late to do something about it. Start your tax planning well before the end-of-the-year deadline.
Scott Taylor is vice-president of TFS Group, providing accounting, bookkeeping, tax return preparation, and other business services for owner/operators.
Learn more at www.tfsgroup.com or call 800-461-5970.