Advice for Small Business Owners

Fiscal Year End

By Elie Kochman on December 28th, 2009

December 31 in most countries (I would say all, but I know that if I do so, someone will point out that some country no one has heard of before doesn’t fall into this group) is the fiscal year end for individuals. That means, as an individual or as any non-incorporated entity, you close your book for each year on December 31. This means that you are trying to get as much processed in December as possible, in order to have your year-end statements look as good as possible, and give you another year to worry about next year.

You may also be ramping up your charitable donations, to help reduce your taxes for the past year. You might be sending out invoices for work done so that you can declare the income as part of the past year. Alternatively, you may be deferring sending some invoices so that you’ll have another year to pay taxes on that income.

Paying Taxes

If you’re incorporated, then you have some other options. A corporation, at least here in Canada and in the United States, can declare a year end any time it wants, although generally corporations will stick to the last day of a month. For an individual, what this means is that your dividends are declared against the year in which the corporation announced it would pay those dividends. If the corporation had a year-end on November 30, you would have to pay those taxes immediately in April. If the year-end was on January 31, however, you would have 15 months to pay those taxes.

You can take this a step further. You can own a holding company, which is jointly held with someone else (for example, your spouse). This company owns shares in another company, which pays dividends. Your holding company could then have a year-end in January, letting you defer taxes for 15 months. If the company paying the dividend has a year-end at the end of February, then you would have 26 months before taxes were due on that income.

Naturally, you could have a dozen such companies, each letting you defer paying taxes for another year.

There’s a catch, however, called GAAP – Generally Accepted Accounting Principles, and the Anti-Avoidance Provision. What these two rules state, in essence, is that you can’t do certain things which might follow the letter of the law, but serve no purpose other than to avoid paying taxes – that is, there is no other reason for you to be doing whatever it is you’re doing.

If you’re a relatively small operator, you may want to set up a holding company to allow you to share your income with your spouse to some degree. Setting up additional tiers, though, could spell trouble in the event of an audit. As you get larger, and set up relationships with other people and companies, however, you may be able to create additional levels as a way of organizing your income.

Warning, however – don’t even think about trying any of this without consulting your accountant. The tax laws are constantly changing, and what holds true today might not be true next year, or next month. At the end of the day, if your accountant is not comfortable with your strategy, it’s their advice that should hold, not mine. After all, they know more about your situation, and the laws that apply where you live.