For some reason, when it comes to managing their finances, affiliates are mostly clueless. Whenever I see a post on an affiliate forum that has anything to do with incorporating or taxes, I cringe inside because I know that ultimately, 99% of the thread will contain pure misinformation. I don’t know why this is. If you make any reasonable amount of money, how you manage your finances makes a huge difference in the amount of money you take home, so educating yourself in this area seems like a good idea. To help the undereducated out, I’ll cover some year end strategies you can employ to reduce your tax bill.

Manipulate the timing of your expenses and revenues

The first set of recommendations have to do with rearranging your expenses and revenues. If you will be in the same or lower tax bracket next year, you’ll want to defer as much income as possible to the future. If instead you anticipate being in a higher tax bracket next year, you should recognize as much revenue as you can now, while deferring your expenses.

The following suggestions assume that you’re using the cash-basis method of accounting, as opposed to accrual. If you don’t know the difference, talk to your accountant or consult your friend, Google. The following methods also assume you want to defer your income:

• Prepay expenses on your credit card. You can recognize the expense as of the transaction date of the charge even if you don’t actually pay it off until next year. This does not go for store charge cards, however–those expenses can only be realized when they’re paid. According to these CPAs, in general, you can prepay up to a year’s worth of expenses under the following conditions:
  • The expenditure is an actual payment — not a refundable deposit,
  • The prepayment is for a substantial business purpose and not merely to avoid taxes, and
  • The deduction does not materially distort income

  What this means is you can load up your favorite PPC accounts by prepaying for clicks now on your credit card. You can recognize this expense this year, even if you don’t pay it immediately.

• If you make payments by check, you can mail them just before the end of the year and have them count as a current year expense, even if they are not cashed until the following year. If you use this method, send your check via registered or certified mail to prove when you sent them.

Set up or contribute to a Small Business Retirement Plan

Retirement plans like a self-employed 401k are one of the biggest tax advantages that the government gives small business owners, especially if you make a lot of money. Consider this: for the 2008 tax year, you can contribute up to $46,000 in a self-employed 401k or up to $51,000 if you’re 50 years or older. Compare that to the poor slobs working a regular W-2 job who can only contribute a max of $15,500 to their 401k (or $20,500 if they’re over 50). An extra $30,000 in tax-deferred money earning interest makes a huge difference by the time you reach retirement age.

For more details on this, I suggest checking out Fidelity’s comparison of available small business retirement plans.

A final warning

I am not an accountant. Nor did I stay at a Holiday Inn last night. If none of what I said makes any sense to you and you’re making decent coin, it’s time to consult a professional.