Lo and behold it’s the fourth quarter and time for you to begin your year-end tax planning. If you have an accountant or bookkeeper, pick up the phone and make an appointment. If you perform these functions yourself, then take action now, before holidays ambush you. Your mission is to minimize the tax bill payable next April.
Let’s start with your place of business. Are you a self-employed professional who regularly works from home? Do you maintain an exclusive space at home from which you attend to your business? Other than meeting with clients, is your home also your principal place of business? Then consider taking the home office deduction. Refer to IRS guidelines and add Form 8829 Expenses for Business Use of Your Home to your tax form filings.
Next, take a look at the revenue your business generated this year. If this year was lucrative, it will perhaps be advisable to push income into the next year, especially if you expect next year to be less flush. Study the matter before you invoice late fourth quarter projects. Call clients to confirm that it will be OK to invoice in January. Many for-profit and not-for-profit organizations maintain a July 1 – June 30 fiscal year, so deferring payment until January may not be a problem.
If you expect no substantive change in revenue generated from this year to the next, consider investing in your business and creating additional tax write-offs this year, rather than next. Remember also to make a contribution to your retirement account. Solopreneurs who have already celebrated their 50th birthday are eligible to make a maximum $22,000 tax-deferred catch-up contribution to their Solo 401K each year, on money generated from self-employment only.
Further, those who’ve had a good year and hold a Solo 401K may deposit up to 25% of their income into the account. The tax-deductible and tax-deferred income limit is $49,000 for those under 50 years and $54,500 for those aged 50 years and older.
The Affordable Healthcare Act must now be factored into your year-end tax strategy. Soloprenuers who qualify for a health insurance subsidy (approximate income maximums of $45,000 for a single person household and $94,000 for a family of four) need not worry about the subsidy being treated as taxable income. However, if your insurer refunds to you a portion of premiums paid, that refund will be taxable and a 1099 will be sent.
Healthcare Act subsidies function to limit out-of-pocket monthly insurance premium costs for those who generate revenues below a certain threshold. The subsidy may be requested as follows:
- Premium assistance credits, to reduce the monthly cost of health insurance
- Up-front lump-sum payment
- Tax credit on Form 1040, to reduce any taxes owed and perhaps create a refund
A statement that documents any subsidy will be issued and there will be an annual reconciliation. If you underestimated this year’s income, you will be required to pay back a portion of your subsidy. If current year income was overestimated, then a refund will be somehow issued. Visit the website of either your state or federal health insurance exchange to obtain information about how to estimate your annual income.
YOU will be responsible for monitoring your annual income and ensuring that you receive the correct subsidy. Ben Tallman of Tallman Tax Service in Atlanta recommends that Solopreneurs monitor revenues and expenses at least quarterly and contact their health exchange and get themselves re-certified in the event of a large increase in income generated, to reduce the chance of facing a subsidy claw-back at tax time.
Kim L. Clark is a strategy and marketing consultant who works with for-profit and not-for-profit organization leaders who must achieve business goals. Kim is the founder and principal of the consulting firm Polished Professionals Boston and she teaches business plan writing to aspiring entrepreneurs. Learn how Kim’s expertise can benefit your organization when you visit polishedprofessionalsboston.com.