We are approaching the end of another year. While it is not yet time to prepare tax returns it is a great time to consider ways to maximize your tax benefits and minimize taxes. One way to do this is to consider the timing of potential expenses.
Some might advocate doing what can be done each year to lower taxes. In my opinion it is often better to look at the current year and review what you expect in the coming year. In this way it is possible to hasten or postpone expenses to minimize taxes in each year. Life changes may create substantially more income or expenses in one year and doing what you can to time other income or expenses can help moderate the impact of these life changes.
There are many examples of expenses that can be hastened or delayed. For instance repairs can often wait for a little while or proceed ahead of schedule. An investor might decide to delay or move up the closing of an asset purchase. Even if an asset is purchased it might be beneficial to consider waiting to put the asset in service. Other expenses such as advertising, professional fees, tools, supplies, cleaning costs might be timed.
While timing income and expenses can be a great strategy — avoid going over the line.
It is an unwise, unethical and illegal strategy to manipulate income and expense dates in an accounting system. While someone might not get caught right away if an audit does happen and evidence is found that fraud occurred the IRS is given a key to open up many additional years for review. Normally there is a 3 year window, but with fraud there is no statute of limitations and the penalties can get quite harsh and are not deductible.
Constructive Receipt
Another consideration for income received is the constructive receipt rule. If a tenant delivers a check for rent on Dec 31st but you wait to deposit it until January 2nd. The IRS will say that it was constructively received on Dec 31st and must be included in that year’s income. Now if a check was received on that date and it turns out to be NSF when deposited on Jan 2nd, no cash is considered to have been received.
No Constructive payment doctrine
Writing a check on Dec 30th and mailing it on January 2nd is not considered a Dec 30th payment regardless of the date you put on the check. It might go unnoticed if it is only a day or two different. Be wary though when a track record is found of checks mailed out that take weeks to clear the bank. If an audit occurs it is standard procedure to test any transactions that occurred near the year end and at the beginning of a new year.
In short, there are legitimate ways to time income and expense items without resorting to fraud or tax evasion.
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