For happy returns in 2005, there are a few simple steps you can take before the end of the year. In particular, time your income and expenses to either defer income into the new year and/or accelerate deductions into this year.

If your company is on a cash basis (as opposed to the accrual basis of accounting), income is acknowledged only when you receive payment and expenses only when you actually pay them. This means you have a high degree of control over your company's finances. For example, if 2004 proved profitable for you, you should pay as many bills as possible before the end of the year to reduce your tax liability. You should consider borrowing money on a short-term basis so you can make capital expenditures. On the other hand, if you lost money this year, you can "shelter" income by collecting as much as you can from customers with outstanding account balances before the end of the year. Offer them incentives such as discounts.

You can also time the shipment of your product. If your company is on the accrual basis of accounting, income is acknowledged when it's earned and expenses when they're incurred. This means that income is recognized when you make a sale and place a legal obligation on the customer to pay you. Additionally, expenses are recognized when you take on a legal obligation to pay a creditor. If you've had a great year, you can reduce your tax liability by making sure that your product doesn't ship until the new year so that income will be logged for calendar year 2005. (Of course, you have to get the customer's approval first.) Additionally, you can pay out bonuses by March 15, 2005 and still deduct them from your 2004 taxes if you're using the accrual method. And if it's been a losing year, you can ship your product before the close of the year to bolster your 2004 income.

Another step you can consider is upgrading your equipment. While leasing may sound more attractive from a cash flow point of view, tax law incentives are making buying needed equipment more favorable. In 2004, you can opt to expense the cost of tangible property, such as computers and furniture, up to $102,000, instead of having to depreciate it over five or seven years. You can expense equipment as long as you used it by the end of 2004, even if you financed it and made no payments this year.

Sources:

Moves to Make Before It's Too Late
Barbara Weltman
My Business Magazine, December/January 2005
www.mybusinessmag.com/fullstory.php3?sid=1108

Year-End Planning for Small Businesses
Theodore F. di Stefano
E-Commerce Times, November 19, 2004
www.ecommercetimes.com/story/38080.html

Wrap It Up Right
Scott Bernard Nelson
Entrepreneur, December 2004
www.entrepreneur.com/article/0,4621,317977,00.html