There are three main areas we need to keep in mind as the year ends:
1. Taxes
2. Corporate
formalities
3. Planning for
next year
Revisit the idea of converting
your 10 largest expenses.
This is an ongoing process that should be done
at least twice the first year. It’s not realistic to expect you will convert
all of your biggest expenses the first time around because it’s too big of a
task—this is a habit needing to be developed over time. Our largest expenses,
habits, and businesses all change over time. As your life evolves, so should
your deductions, so keep current.
Strategy: upstreaming income.
The goal of upstreaming income is to shift
income from this tax year to the next tax year. Whatever your operating account
balance is on December 31 will get added, as of January 1, to your last year’s
income. If you have a $50,000 balance, for example, going into the next year,
that’s taxable income. You therefore should upstream the money, making it no
longer taxable for that year. This strategy is applicable if you have an S
Corp, partnership, limited partnership or sole proprietorship.
How to upstream income
Upstreaming income
is accomplished by setting up a new entity such as a management company with a
different yearend than your business. A business’s income can then be shifted
out of the 2020 tax year to 2021. You will want a contract and invoices to
reflect this agreement between your business and management company. Move the
$50,000 balance to your management company with a June 1 year-end, for example.
The money should be moved ideally at least on a monthly basis, not just once at
the end of the year. I recommend taking five to 10 checks out of your check book
and put them in a file for the upcoming year. In January, if you find out you
had some expenses you missed—it’d be a lot better to have a check in sequence
that you can write from December.
Disclaimer:
This article is presented solely as an example and is not meant to replace
qualified financial advice. If you or someone you know require up to date
financial or legal help, seek qualified assistance. No content on this site
should ever be used as a substitute for direct legal counsel from your lawyer
or a qualified attorney.
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