Year-End Tax Savings: What’s Better Than Saving Cash This Time of Year?

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Who doesn’t love to save money around the holidays? Businesses can make use of this awesome year-end tax savings tip: Accelerate your tax deductions.

You may remember we recently posted our essential year end checklist. Well, we wanted to dive a little deeper into #15: use up your end-of-the-year budgets to maximize your tax deductions in the current year.

How can I use tax deductions to help my business save money this year?

If you are a cash-basis taxpayer, under the 12-month rule, you can pre-pay up to 12 months of a service and you still get the full year-end tax savings deduction in the current year when you paid for the expense. This is also true for anything you pay with a credit card in the current year, even if you do not pay off the credit card until January of the following year. Assuming an average tax rate of 40%, then accelerating these payments is like getting an awesome 40% off coupon just in time for the holidays.

Under the cash method of accounting, you generally deduct business expenses in the tax year you pay them.

via IRS

Want to save even more?

That’s right. We said save “even more.” Do you pay for any subscription-based services? Think cloud storage solutions, task managers, CRM’s or really any Software as a Service (SaaS) subscription. Typically, your tax rate deduction will be around 40%. Additionally, most subscription-based software or cloud solutions offer you a 10-20% discount if you pay upfront for a year of services instead of paying monthly. By combining the year-end tax savings deduction, and the annual payment discount, you are looking at savings of close to 50% or more. Learn more about how our accounting for SaaS companies can help.

Example: Year-End Tax Savings

First, we are assuming a typical tax deduction of 40%. Second, assume you are planning to subscribe to a SaaS, which charges $100 per month. However, if you pay for their subscription for a year up front, and they offer a discount of 20%, it is then only $960 for a year of service. Then, subtract your tax deduction of 40%, and you are now effectively out of pocket only $576 instead of what might have been $1,200 over the course of the following year. As long as the subscription expires before the 12 months are up, you can still claim your full deduction of 40% in the current tax year. This immediate year-end tax savings is a huge advantage versus waiting a whole year for the deduction.

The Bottom Line

There you have it. A relatively straightforward way to maximize your tax savings at a time when it just might make all the difference.

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