Most entrepreneurs aren’t thinking about their 2016 taxes this month, but they should be…there are some things you need to do before December 31 to take advantage of certain deductions and tax credits for your 2016 tax return. And, it’s also a good time to have a boost in your cash flows. Here are 12 tips:
Increase Your Cash Flows
- Want a boost in your cash flows this last month of the year?Look at where you are leaving money on the table – it could be outstanding receivables, over-delivering on your services, not following up on leads (how awesome would it be to book another client or two just before Christmas?!).
- While you’re at it, why not review your payment policies…maybe a change is required such that you’re getting paid in advance or at the very least on the day of service (that way you don’t have to worry about chasing those receivables after the fact).
- Now is also a good time to review your pricing strategies to make sure your charging for value. Now would be a good time to notify your clients of price increases that will take effect in January.
2. Consider accelerating purchases for your business.
As a business owner, you probably have a good idea of the things you need for your business. If you want to get the deduction from your income this year, purchase items you need in your business on credit in December and pay for them in January when your credit card is due. This way you’ll get the tax deduction this year but defer the cash outlay until next year.
- Pre-sell packages/services/goods to be delivered in the new year.
‘Tis the season for giving, so why not offer an incentive for people to pre-order goods and services and pay for them now, that they’ll receive in the new year. Examples could be taking custom orders for your goods for future delivery, offering gift certificates for clients to give to their loved ones that they can use in the new year, offer savings/bonuses to pre-sell a program/course/workshop that will take place in the new year.
4. If you haven’t already done so, now is a good time to look at your 2017 plan. When you have clarity in where you’re going, and align your actions to achieve that, you’re telling the Universe that you’re open and ready to receive. That receiving may even happen sooner than you think. Going back to my previous point – when you have clarity of your 2017 goals/targets/plan, you can decide which offers to promote and pre-sell now.
When you’re planning for the new year, plan with the end in mind and ask these key strategy questions:
- What is your overall vision, purpose and goal?
- Where will you play (play where your target clients are)? How will you become more visible and build your audience?
- How will you hit/exceed your targets? What will you offer, at what price? How/when will you get paid? What are you marketing/sales strategies? How will you know you’re on track? What are your back up plans?
- What capabilities/resources need to be in place to support that?
- What management systems need to be adopted and implement to support that?
Optimize your 2016 taxes
So now you’ve injected some extra cash into your bank before year-end, the year would not be complete without thinking about how to optimize your taxes. Here are some tax-saving tips that you’d need to consider doing before year-end.
- Maximize your CCA (tax depreciation) claims.
Purchase business equipment before year-end to accelerate the capital cost allowance (CCA) deduction by one year. For most equipment purchases, you get 1/2 the CCA deduction in the year of purchase. So if you purchase in Dec 2016, you get 1/2 the year’s CCA in 2016, then a full year’s worth in 2017. If you wait until early 2017 to make the purchase, you only get 1/2 the year’s CCA in 2017, even though you’ve been using it for almost a full year. Again, buy them on credit and pay later, allowing your to get the deduction in 2016, but defer the cash outlay to 2017.
2. Keep cash in the family and reduce your taxes.
Pay a reasonable salary to your kids/partner for actual work they do for you (this is a form of acceptable income splitting). You get the deduction, and the income should be picked up in their income tax return for the year, presumably at a lower tax rate than yours. But, also beware of additional tax compliance and amounts you have to remit (such as CPP contributions and completing T4’s).
3. Maximize your car expenses.
If you use your car for business, and you know you’re car is in need of service and repairs (perhaps new winter tires?), make those necessary car repairs before year-end to get the deduction in your 2016 income (in proportion to your business use of your car). While you’re at it, update your mileage log to track all your business km’s.
4. Maximize the Canada Education Savings Grant (CESG) for the year by making your RESP contributions prior to December 31.
If you have kids under the age of 18, the Canadian government give you a grant on the RESP contributions made for your kids’ post-secondary education. The grant is 20% of the RESP contributions, to a maximum of $500 on $2500 of contributions made in the calendar year. Now is the time to top up your RESP contributions to take advantage of the maximum available CESG for the year. There are additional grants available for low income families and kids with disabilities.
5. Maximize your RRSP contributions.
Assuming no carry-over room or pension adjustments, you can contribute 18% of your earned income for the previous year to your RRSP in 2016 (to a maximum of $25,370 for 2016 contributions). Many people wait to top up their RRSP contributions until February. However, there are a few instances where it would make more sense to do so before the end of the year.
- If you’re nearing retirement, and make spousal RRSP contributions, consider that if you wait until Jan/Feb 2017 to make those contribution, your spouse will not be eligible to withdraw them until 2020. Making the contribution in 2016 accelerates the eligible spousal withdrawal to 2019.
- As a tax free savings vehicle, if you’re 18 or older, you can make after-tax contributions to a Tax Free Savings Account (TFSA). The maximum contribution for 2016 is $5500 (like RRSP’s, the unused contribution room gets carried forward and available to you in future years). If you’re planning to make a withdrawal from your TFSA, do it now instead of waiting until January – that way your withdrawal is added back to your contribution limit for 2017 (otherwise you have to wait until 2018 to be eligible to add it back into your TFSA).
6. Maximize your medical tax credits.
Medical and dental expenses incurred in the year can only be claim if paid in 12 month period (claim period) that ends on or before December 31. So, you’ll want to pay those outstanding medical expenses/prescription refills/dental bills before year-end to maximize your claim for 2016.
7. Optimize your charitable donations tax credits.
Total charitable donations in excess of $200 made in the year can give a higher tax credit (approximately 40% in Ontario) than your marginal income tax rate, giving you a net benefit on your tax return. But, the donations have to be made in on or before December 31 in order to be claimed on your 2016 tax return. So if you’re planning on giving, December is a great month to give.
8. If you have unregistered investments which are giving you taxable gains in the year, consider selling stocks with accrued losses to offset realized gains for the year to reduce your taxable income. Also, consider paying investment related expenses before year-end in order to get the deduction for this year against your investment income.
So there you have it – 12 ways to increase your cash flow and optimize your taxes for 2016. Of course, these are general statements – each person’s situation is different and must be considered carefully before making decisions that will affect your taxes and cash flow, taking in to account the specifics of your situation. I would suggest you speak to your accountant/tax advisor/investment advisor to be sure you’re making the best choices for your unique situation. I’m happy to assist as well – contact me and request your complimentary clarity session to see how I may help.
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