With the festive season underway, tax may not be that high on the business agenda at this time of the year. However, a quick look now at some pre year-end tax planning tips for your business can pay big dividends for 2011. Below are five I have selected, especially for Small and Medium Enterprises.
Update your accounting records
It is important as part of your year-end tax strategy to have a good understanding of your company’s financial situation. Spend extra time ensuring your books are up-to-date and accurate. It won’t hurt to plan time with your accountant for year-end advice, particular to your operations.
Any income your company can earn during the first week of January as opposed to December cuts your tax bill. Every cent earned up to December 31, 2011 will give rise to a Value Added Tax (VAT) liability that is payable by January 15, 2012, and potentially also a corporate income tax liability that must be paid latest by March 31, 2012 that is three months from now; whereas income deferred to January 2011, a month from now, will not owe taxes until March 2013 (15 months from now).
Of course, any deferral strategy must be genuine, meaning the sale of the goods and services should be genuinely delayed. Otherwise you would be accused of tax evasion. It must also take into consideration your original plans for the year, including your budget, as well as business plans for the new year.
Depending on your current tax position and income tax rates in the foreseeable new year, deferral of income can make the best sense for many sole proprietors and partnerships.
Of course before you defer your income for tax purposes, you need to ensure that your cash flow can handle the deferred income.
Purchase items your business will require in the immediate future to maximize deductions for this year. If you can see a need for goods and services in the first quarter of 2012, buy them now, if cash flow permits.
Such expenses and purchases may include stocking up on office supplies, early payment of your business’ bills, such as subscriptions, rent, insurance, and utilities.
If you will be buying new office equipment, consider purchasing them now, and put them in use before the year end. This can result in tax saving (through capital allowances) of up to 50 per cent of the capital costs of your equipment, depending on the location of your business and nature of the equipment.
Depending on your accounting methods, you may wish to check inventory for goods and stock that have been damaged or have become obsolete. Writing down the value of your inventory to reflect the drop in recoverable value of the stock will ensure that your company or business obtains a tax deduction for the related drop in value as this is a tax deductible expense.
Accrue for expenses before the year end. Make sure that you accrue for all your business expenses and costs relating to 2011 before the yearend date, even if you have not yet been invoiced for them. This may include rent, utilities bills, subscriptions, audit fees, and all other costs that you have already incurred or expect to incur in the future, which relate to the 2011 year of income.
Remember, these year-end tax tips will apply differently to each business owner’s situation and accounting methods.
Therefore it is advisable to spend time with your accountant and tax consultant to consider these as well as other tax planning ideas, before you close your books for 2011.
Paul Frobisher Mugambwa is Tax Manager, PwC Rwanda