It’s hard to believe that Labor Day is upon us and another summer season is closing. I look at Labor Day as the final turn towards the end of the year. With the flurry of business activities coupled with time outdoors and the holidays, it feels like a sprint to the end.
So how is your business doing this year?
Most business I talk to say that they are the busiest they’ve been in three years. Hopefully, it means they are profitable as well. With growing profits come thoughts of tax planning and how best to mitigate the associated year-end tax expense.
A common and obvious choice of avoiding tax liabilities is purchasing large capital items and taking the accelerated depreciation option we all call Section 179. If you are looking for $50,000 of tax expense this year, using this tax tool will work. It’s also great way to get that shiny new Dodge 4500 crew cab with that utility bed you had your eye on that you really don’t need.
The real and underlying problem is most companies incur debt to take advantage of this tax strategy.
Instead of creating tax expense by incurring debt, consider adjusting your current “on-hand” inventory that is old or obsolete as a way of reducing taxable income. The cash from 10 to 15 years ago bought these items and adjusting the old inventory value on your books is a current year non-cash expense.
Many businesses have obsolete inventory on their shelves. Heating oil contractors have boiler controls from 1970, painters have deck coatings from 1995, cabinet makers have racks of outdated Formica, and manufacturers have components for units they are no longer manufacture. I would expect that no one has assessed the usefulness of the inventory and that the items are valued at the original cost. Now that you have profits, a real non-cash expense would be to take the inventory that you are not going to use and write it off as obsolete. The reduction of the year-end inventory value for accrual based tax payers turns into an increase in the cost of goods sold amount, reducing both book and tax income for the year.
Before you bring in the dumpster and throw it away, review the preliminary adjustments with your accountant or tax professional to make sure you are not breaking any loan covenants. A $75,000 downward adjustment in inventory will affect your current ratio and your working capital amount since both of these use inventory values in their calculations.
Enjoy the “last weekend of summer” and get ready to finish your year strong.