The end of the year is here and for most businesses, that means the end of their fiscal (financial) year. Hopefully it has been a profitable year. If so, you only have a little time left to reinvest in your business and thus reduce your taxes.
This strategy has literally saved me thousands of dollars in taxes every year. But in order to appreciate this approach, you have to embrace these two beliefs.
1. In business, there is really no such thing as an expense. Everything you spend to advance your business is really an investment—otherwise you wouldn’t spend it. For every dollar you invest into your business, you believe that you’re going to earn a return that is at least greater than the interest rate on your savings account (The average savings account has a measly 0.06% APY). For accounting purposes, these investments are called expenses, but in reality, every dollar you spend is an investment in your business.
2. In the short-run, income maximization is not the goal. Income maximization is the long-term goal. Taxes account for about 30% of your income. If your business grew by 30% each year, you would be doing better than most Fortune 500 companies. One of the most vital financial strategies that wealthy people employ is tax avoidance. I don’t mean illegally avoiding taxes—that’s tax evasion. I mean using their money wisely. That’s how Warren Buffet can pay less taxes than his secretary who only makes a fraction of what he earns. Taxes are actually a good thing in my eyes, because they force us to either reinvest in our businesses or take a 30% hit. In a way, our tax code encourages entrepreneurs to splurge and shop at the end of the year.
Here is why. The secret to reducing your taxes is to increase your expenses. I know. It sounds counterintuitive, but it’s true. Let’s say that the tax rate is 30%. And in 2013 you made $15,000 in revenues with $5,000 in expenses. That leaves you with a profit of $10,000. If you carry that profit over to January 1st, you will pay Uncle Sam about $3,000 in April leaving you with only $7,000.
But watch this.
If instead, you said to yourself, I’m in this for the long-run. I’m going to double-down and reinvest the entire $10,000 I made back into the business, because I believe in myself and my business. Therefore, I don’t want to take $10,000 profit into the new year and get taxed. Instead, I’m going to reinvest all $10,000 back into the business before the year is over on December 31st. That leaves you with a profit of $0 which means $0 in taxes.
Make sense?
So what do you invest in?
There are several things that you already know you’re going to need into the next year, so why not just buy them before December 31st instead of on or after January 1st. By doing so, you will essentially save 30%.
Here are 6 things I invest in every December.
1. Pre-Paid Expenses:
These include a lot of monthly expenses like rent, internet and phone bills, and utilities. Whoever you rent space from will be extremely grateful because you have taken all of the risk out of the relationship for them. And most monthly service-based companies and utility companies allow you to make as big of payments as you want.
2. Retainers:
If you have a strong relationship with a consultant who you work with often, you can essentially give them an advance in the form of a retainer. Similar to a tab at the bar, they will bill against the amount you paid them ahead of time. They will bear the tax this year instead of you. I do this with my accountant and lawyer every year. I look at how much I paid them year-to-date and I advance them that amount before the year end. This can also apply to anyone you get regular support from and anticipate working without throughout the next year such as your PR company, social media marketer, web developer, designer, or coach.
3. Supplies & Equipment:
Perhaps you want to shoot more video next year and want to invest in a new $1,000 camera. If you buy it before the end of the year, it will cost you $1,000. If you wait and hold onto the $1,000 until next year, you will pay about $300 in taxes on it, leaving you with $700. So next year, that camera will essentially cost you $1,300 instead of $1,000. Other basic supplies include stamps, pens, paper, and ink.
4. Conferences & Trainings:
There may be several conferences that you are going to to market yourself and your products or there may be some trainings where you are going to learn and grow. Either way, annual conferences are usually planned over a year in advance and if you know you’re going, you can get the early bird price as well as book your travel and hotel.
5. Inventory:
If you have a product-based business, you can invest in raw materials. As long as they don’t spoil and you have storage space, you can get bulk discounts.
6. Domain Names & Hosting:
This may only have a small impact, but if you’re like me, you have tons of domain names that you’ve bought over the years. You can go ahead and pay for 1-3 year commitments with the extra profit you have from this year. You can also renew hosting for your website.
In order for this to work for you, two things have to be in place:
1. You have to be incorporated. You can’t expense or write-off anything if you have a side hustle that is not incorporated. Any revenue (not income) you generate will be added to the income you’ve earned from your day job and taxed accordingly. Therefore, you won’t get the benefit of increasing your end-of-year expenses.
2. You still must be able to afford your personal cost of living. If you’re a side hustla who is living off the profits of his or her business, then this won’t work because you need that $10,000 to pay for personal expenses like rent, food, gas, clothes, etc. This strategy assumes that your business income is separate from your personal income, thus you are able to reinvest your business income back into your business.
This strategy is like having a 30% off-everything-coupon that expires on December 31st. I hope that between now and then you can make some great investments in your business that yield even greater returns for you next year.
