The end of the financial year is approaching in Australia and small business owners need to start planning their tax strategies. Here are our tips on how to reduce your small business tax bill by timing your income and expenses.
We all know that when you run your business, you want to maximise income and keep expenses as low as possible.
But when it comes to tax time you should aim to do the opposite – minimise income and maximise expenses in order to reduce your assessable income and the amount of tax you have to pay.
Of course, you don’t do this by turning away customers or needlessly spending money!
Instead, it’s all in the timing. In other words, you bring forward expenses into the current tax year, and defer income into the following tax year.
While you might eventually have to pay tax on the money you save, in the meantime the extra money is yours to use as you see fit – to invest back into your business, to reduce your borrowings and hence your interest payments, or to earn interest in the bank.
Crunch the numbers: cash vs accruals
Many small business-owners start out with cash accounting – that is, recognising the income and expenses in your business when they are physically paid.
Timing strategies work best with accrual accounting so, if you haven’t already, you might consider making the change.
Accrual accounting recognises income and expenses when you issue an invoice or receive a bill, not when you receive or pay money. This accounting method creates debtors and creditors, so it’s a good idea to use online accounting software like Xero, which makes it easy for you to keep track of your business’s cash flow and its true financial position.
Spend it now: bringing forward expenses
First up, look at all of the regular expenses you have coming up and see if you can bring any forward to before June 30. These include costs like insurance, rent and professional association membership fees.
If you calculate your tax using the accrual method, the good news is you don’t have to actually spend the money before June 30 to get the deduction. What’s important is that the invoice is issued to you before then. For example, if your business is getting an IT upgrade, you can ask your supplier to issue their invoice before the end of the tax year. Even if you don’t pay it straight away, you can still get a tax deduction for the expense.
Likewise, think about any purchases you’ll be making for your business in the new financial year. Is there anything you’re thinking about buying in July that you might bring forward by a few days or weeks?
Another reason to spend the money now and not later is that there are some generous small business tax concessions available for depreciation of assets that might not be available next year.
But don’t go overboard.
The whole point of this strategy is to maximise the cash you have on hand by increasing your tax deductions, so don’t bring expenses forward by too much. There’s little point in buying supplies you won’t use for 11 months, say, because you’ll be doing without all that cash for the sake of deducting only some of it.
Don’t pay me yet: deferring income
Look at the invoices you have coming up, particularly for major sales or projects. Can you hold back on issuing them until after June 30? If you do, you won’t have to pay tax on the income until the following year, giving you more cash on hand. As with expenses, however, don’t delay invoices too much for the sake of the $0.30 in the dollar tax saving.
The same applies with sales of assets, such as your business premises or goodwill. Any gains your business makes will be taxable, so think about deferring sales until the new tax year.
Likewise, if you think you’ll make a loss on the sale of an asset, see if you can bring forward the sale to the current tax year so you can offset it against your current income and pay less tax.
(There are tax concessions available to small business for the sale of some assets, so check with your accountant before you offload anything.)
Don’t delay: small business tax should be in order, on time
Once the calendar tips past June 30 you will have missed your chance to take advantage of accruals. So start planning now. Comb through your expenses to see what you can bring forward and look for any income that you can delay.
Invest a bit of time in this groundwork now, and you’ll benefit from some useful tax savings come July.