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The End-Of-Year is coming up soon, and -- if you were fortunate enough to profit this year and, therefore, owe taxes next year -- that means it's time to spend, spend, spend!

What have you done in years past (or plan to do this year) to reduce your bottom line?

Some things we've done in years past:

  • Supply it up - buy every conceivable office supply that you might need over the next year
  • Swag - reorder the tchotchkes you might need to get and/or place a "phantom order" with your swag company to get credit for things you'll decide on later
  • Restock Scotch Library - get back-up bottles of favoriets, etc

I'd love some more ideas; you're not supposed to deduct prepaid expenses... so, if you prepay your 2010 phone bill in 2009, you can only deduct it in 2010. But you can depreciate for the entire year of 2009 even if you buy on Dec 31st.

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UPDATE Didn't mean to imply buying unecessary crap, or crap at all; just good ways to avoid paying 40%+ tax on things you might need or might help in 2010..

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4 Answers

up vote 3 down vote

I disagree that the best use of year-end profits is to spend it on crap that doesn't add to the bottom line or company morale.

I know you don't like paying 33% for taxes (more if not in USA), but you're left with 66% that you can use on the company, as opposed to spending it on unnecessary crap and being left with 0%.

Why not at least bulk up your marketing? Buy N months of ads on M sites for 2010, pre-paying so you don't pay taxes. That's better than liquor.

I don't think your depreciation statement is right either unless it's over something like $120k, but I'm not an accountant... For example, almost all monthly-billed services will give you a discount if you pay for a whole year, but I've never deducted that expense over time as you suggest.

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I'm with you Jason. Pre buying marketing for next year is a great suggestion. It is pointless to spend solely for the purpose of reducing year end profits. If you really want to reduce your income and tax liability, give your employees a nice year end profit sharing check. At least you'll have their loyalty and appreciation in return! – Keith DeLong Nov 28 '09 at 1:37
It's like 40%+ once you add in state and local. As for paying for 2010 services in 2009, see IRS Pub 535: "You cannot deduct expenses... paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year." – Alex Papadimoulis Nov 28 '09 at 5:22
Also... you may be thinking of the 179 deduction? That allows you to depreciate up to $250K of equipment purchases in the first year of service instead of over the equipment's lifetime. So, you can buy a bunch of computers/servers that you might need in 2010 and enjoy the deduction in 2009. – Alex Papadimoulis Nov 28 '09 at 5:30
Paying for marketing IS NOT AN ASSET. In accounting "asset" has a very specific meaning, and marketing contracts are a LIABILITY, not an ASSET. They're talking about capital equipment and furniture, and even then there's a $100k limit which if you're below (e.g. software companies typically are when they're small) you still don't have to depreciate. – Jason Nov 28 '09 at 13:51
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No, but prepaid marketing (or any prepaid expense, such as insurance premiums) is considered to be an asset. However, even if you're using cash-based tax accounting, the IRS does not allow deduction of prepaid expenses which are realized in a future tax period. Many people do it anyway, and it slips under the radar just fine, but it's still not allowed. – Alex Papadimoulis Nov 29 '09 at 19:09
up vote 2 down vote

Hm. How about hiring a really good accounting professional for an advice on legitimate tax reduction tactics? Is it not "extravaganza" enough?

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Ha, true enough, +1. Still I have paid for an accountant so my answer is based on the truth of running a small software company. Still, you win. :-) – Jason Nov 28 '09 at 13:52
Our CPA says: "if you don't want to pay taxes, then you have to spend the money on legit things", which is all I'm looking to do. Charity, parties, supplies, equipment -- all legit purchases. – Alex Papadimoulis Nov 29 '09 at 19:08
up vote 1 down vote

You can throw a nice Christmas party for your staff or give out bonuses.

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up vote 1 down vote

Eventually we will have a more formal policy of donating to charities or perhaps create a foundation of our own. However, we don;t yet have the capital to do either - we'd rather put it back into growing the business.

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We like to drink and fine spirits are expensive; but, +1 for the charity suggestion. This is something we also do as part of the EOY tax extravaganza. – Alex Papadimoulis Nov 28 '09 at 5:24

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