Congress allowed some important tax bills to expire this year. It’s turned traditional year-end tax planning upside down. Usually, we encourage our clients to do their tax planning in September, but this year we have to wait. Hopefully in November we’ll hear from Congress on these bills. Meanwhile, you can’t do a complete tax plan yet, but you can do some very important things to get you ahead of the game before year end.
#1 October Tax Tip: Get your bookkeeping in order!
If you ask me what you need to do to pay less taxes, I’m going to ask for your financial statements. Numbers. If you’re just guessing, you’re not going to get the best answers.
So, let’s face facts.
If you don’t have your financial statements done for 2014, at least SOME of 2014, you’re probably not going to get them done by the time you need them for tax planning.
Hire a bookkeeper. Don’t count on having the time to get your accounting caught up and to do the accounting to the level of accuracy that you need. You don’t have time. Hire a bookkeeper.
You should have separate financial statements for every business you have and I also recommend that you keep an accounting on your personal income and expenses. It’s not required, but we often find deductions in your personal account. More deductions = less tax.
#2 October Tax Tip: Catch your business structures up!
If you meant to get a business structure before year-end, there still may be time. Talk to a tax pro ASAP. You may have formed an LLC and haven’t done the business structure entity election yet. It’s better if you get that done before year-end. You may still get a late election if you wait, but it’s harder.
This is also a good time to make sure your records match what happened. If you added a partner, or deleted one, make sure you have a paper trail and have made the proper amendments with your state.
Once we know what Congress is going to do, tax and year-end planning is going to go fast. Get your business structure trail caught-up while you still can.
#3 October Tax Tip: This may be your last chance to make a mileage log for 2014.
If you have a car or truck you use for your business, you’re going to need a mileage log. And, let’s face it, most people don’t keep one. Now is your chance to get legal for 2014!
The best answer is, of course, to keep a log for the entire year so you can clearly delineate business miles and personal miles. The old school method of keeping a notebook in your car and writing down every trip still works. There are some smart phone apps like milebug and miletracker that can do it electronically.
But let’s say it’s almost October and you haven’t got any records yet. What now?
You are allowed to extrapolate your mileage, with some discretion. If you started in October and kept the logs through the end of the year, you would have 3 months of logs. That’s certainly better than nothing.
If you don’t have mileage logs, start them now. You still have time.
#4 October Tax Tip: Set up a pension plan before the rush.
There are two reasons to have a tax-deferred pension like a 401 (k), SEP-IRA or the like.
#1 The most common reason to have a pension plan is to build a retirement. That is not always the most compelling reason for an entrepreneur, though. Many entrepreneurs would rather watch their own investments and have immediate use of cash. Plus, if your income is going up over the years, you are moving income from a lower tax rate to a higher tax rate.
#2 This is the most common reason for my clients. If you have an exceptionally high income year, you can max out a pension. If your business tends to move in cycles and you experience a low income year, you can then move some of that pension into a Roth account. It’ll be taxable in the year it converts, but it then can grow tax-free. The only reason you didn’t just start with a Roth is because you were minimizing the tax in the high income year.
Now, here’s the problem. The pension plans have to be set up before year-end. So, if you’re waiting to talk to your tax professional until 2015, it’ll be too late to do a pension plan. If there’s even a chance you want to use a pension plan in 2014, get it set up early. You don’t need to fund it yet. Just set it up.
#5: October Tax Tip: Know your goals for 2014.
These past few months, Richard & I have been kicking around buying a new house. One of the things that was holding us back was knowing that borrowing had gotten a lot more complicated since the real estate crash. We could always find private money, but I’d wanted to get one of those really low mortgage rates that are being advertised.
I ran into a friend on Facebook who is an expert on deciphering the complicated lending rules for self-employed people and there were a couple of things I discovered right away:
Some of your business deductions are added back in determining your income to qualify
For the most part, though, you need to be able to prove your income on two years’ worth of tax returns.
If you’re planning to get home mortgage in the next few years, you may want to plan for loan qualification and not just tax planning.
This is where you need to know exactly what you do want for your 2014 tax return.
There are a couple of ways that we can help. If you’d like to have a consultation with me or become a client, please contact Richard at 888-592-4769. If you’d like to just ask a question and get an answer for free, check out the button on the right hand side for questions. We’ll answer the question in a blog.