United States: Year-End Tax Savings: What's Better Than Saving Cash This Time Of Year?

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: using up your end-of-the-year budgets to maximize your tax deductions in the current year.

How Does this 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.

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.

An Example of the full 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 content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.