Tips to Reduce Your 2006 Income Taxes in 2007

Income taxes are a substantial burden for business owners and real estate investors. There are few actions which can reduce your 2006 taxes after December 31, 2006. This article summarizes four options for reducing your 2006 federal income taxes during 2007. These include reducing revenue, increasing real estate depreciation, increasing expenses by conducting a fixed asset audit and increasing expenses by converting capital expenditures into operating expenses.

The basic process for calculating income taxes is simple:

Revenue - expenses = net income, or taxable income,

Taxable income x tax rate = income taxes

Two options for reducing income taxes are to reduce revenues or increase expenses. It is not possible to change the tax rate except through congressional action. It may be possible to reduce revenue for taxpayers on an accrual accounting system. Taxpayers may be able to increase expenses by increasing real estate depreciation, personal property depreciation or operating expenses.

Accrual accounting recognizes revenue when it is earned. Cash basis accounting recognizes revenue when payment is received. Accrual basis taxpayers can review revenue which has been booked but not yet received. In some cases, it may be appropriate to increase the allowance for bad debt. There is little cash basis taxpayers can do to reduce revenue (after the end of the year). However, reasonable people can disagree about the bad debt allowance with an accrual accounting system. It clearly involves judgment regarding the timing and probability of receiving payment.