Paying ahead, a tax savings?

[kimmy]

Is it allowed to pay ahead on bills at the end of the year so I could claim them on this years taxes? For instance, could I pay my laundry service $300 ahead at the end of this year then they would just credit my account for the begining of next year.

Let me know,
TIA

 

[nonmisogynisticAL]

It depends on what accounting method you used when you first started paying business taxes. (You can't switch from one method to another....you need to stick with what you started with). If you use the cash method, you deduct at the time you pay the bill (and you could pay ahead). If you use the accrual method, you deduct when the expense actually occurs (meaning you can't pay ahead).

 

[griersetrorry]

Hmmm.... You know, I am not sure what method my accountant uses. I just assumed there was one way!!

 

[morriss]

And what about gift certificates?? Can this effect gift certs too?? Especially when we have such a heap of them at the end of the year?? I always added everything up and concidered it part of my Deceber earnings. I dont save it until the cert is redeemed. Would that make me the cash method??

 

[rayb1214]

Whatever accounting method you use, gift certificates should be claimed at the time they're sold, not the time they're redeemed. They're not a bill; they're a sale.

As for your accounting method, don't guess!! The IRS is very clear about sticking to one method. Just ask your accountant, and make a note for yourself to remember next year in December, when you (and all of us) are wondering about last-minute deductions.

 

[Crystal?of?Iris]

Bliss, like I said, I do claim gift certs right away. But, I do know a lot of people who do not.

 

[Zafrin]

Paying ahead, a tax savings?

Is it allowed to pay ahead on bills at the end of the year so I could claim them on this years taxes? For instance, could I pay my laundry service $300 ahead at the end of this year then they would just credit my account for the begining of next year.

Let me know,
TIA

In our business we can. Our accountant even suggested this, as we're trying to get everything into this year, d/t some changes in the office we will be making next year.

Our accountant also suggested not making any big deposits until next year, if possible.

 

[Poe Bird: Hiding in B&A]

Tax paying strategy

Bliss, like I said, I do claim gift certs right away. But, I do know a lot of people who do not.

This will make you pay more taxes than you should, which is what you are trying to avoid.

Selling a GC does not impact your profitability (which is what you pay taxes on) until it is redeemed.

 

[Pompal 09.]

RandR,

But wont you have to pay taxes on that money at some point??

What do you do with that money?? Put it away in a bank account?? It is mine to use as I see fit, so I just assumed I would have to pay taxes on it.

What happens to unredeemed certificates??

 

[^_^]

I did some further research on the gift certificate issue, and it appears it has to do with your accounting method again. If you're using the cash method of accounting, where all money is income when it is received and all expenses are deductible when paid, then you claim the gift certificate at the time of sale. A business using the accrual method of accounting doesn't receive taxable income until all of the events that made the money are concluded, and the gift certificate is redeemed (or expired). However, you'd have to keep very good records for this second method & be sure you do claim the gift certificates that never get redeemed. Otherwise you're vulnerable to IRS penalties for unclaimed income.

 

[Ablebaby]

it is all in the timing

Here is what you are currently doing:

Let's say you sell a $100 GC and are in the 25% tax bracket.

If you claim the sale tomorrow, you owe uncle sam $25 and have $75 in hand which you are free to invest and earn $3 over the next year. On this same day next year, the client comes in and your employee gives the massage. You pay $50 to the employee, which is a loss since you have no income from that client this year, which reduces your tax burden by $12.50

But at the end of the year, you have $103 in income, $50 in expense and paid a net $13.25 in taxes, with a grand profit of $39.75. but you only have the use of $75 over the course of the year because you pre-paid your taxes by claiming it as 100% profit at the time of the sale.

Here is a better way

You don't claim the sale this year, because what you sold was a "promise" of a massage. You have $100 in your account. Financially, your balance sheet went up in the asset column (cash) and up in the liability side (IOU a massage WORTH $100). So all is right in the world. You owe no taxes on the $100. The $100 can earn you $4 over the next year.

$104 - 50 - $13.50 in taxes = $40.50 in profit. You also gained the use of that extra $25 for a year. $.75 in extra profit and the use of $25 for a year may not sound like much, but if you sell 20 GCs for the holidays that means you have an extra $515 in your bank account to help carry you through the slow times.

There is no additional work - you have to account for it some way.

If a GC expires unredeemed, the math is the same, except you don't have the $50 expense of providing the service.

 

[}{acker Pro]

I called my accountant and left a message. Her office is closed until next wednesday. I will get this all cleared up on Wednesday.

I truly appreciate all your help and insight R&R and Blisss.