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  1. #1
    ABW Ambassador ticketguyz's Avatar
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    Tax Tip for Those with Good Cash Flow or Reserves
    Could be wrong about this, so feel free to correct me...

    Those of you that can stand to miss your December payment (defer until January) can save on that check amount a total of 15.3% (self-employment taxes) + whatever income tax bracket you're in (so that should be in the 30-40% range for most of us). This savings is only temporary, but if you are looking at a hefty tax bill in the spring because you didn't plan properly or make estimated tax payments, this is the way to reduce the bill for this year.

    This works for only those of you that file on the cash-basis (check your 2004 return on the front page at the top to see if you file cash-basis or accrual-basis). I believe if you change your minimum payment to something big enough to exceed your upcoming payment, CJ won't send the check this month. You can then drop the amount back down for January's payment, and you'll receive 2 months worth with the January 20th payment. This works for cash-basis payers because you don't report income as earned until it is received. In fact, for those of you that do PPC spending, you'll be able to deduct your PPC costs through December 31, while reporting income only through October 31 in a sense (since those are the last transactions paid out with your November payment). This can really reduce the amount of income that you report. If you use Overture heavily, you can always load up your account with prepaid advertising and deduct that in 2005 as well.

    The major caveats to doing this...
    1) You'll have to pay taxes on the deferred income at some point in the future. You can do this again at the end of next year if you want to keep deferring it, but you'll eventually have to report it as earned. If you're currently in the 10-15% tax bracket, you may want to consider eating the extra money this year, if you expect to be in a different tax bracket next year.
    2) You'll show less income on your tax return... duh! right, but it matters if you need to prove your income for, say, buying a home.

  2. #2
    Moderator MichaelColey's Avatar
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    Great tip! This is something that you can do with many networks. I'm doing it this year with CJ, LinkShare, and Google AdSense.
    Michael Coley
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  3. #3
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    too late. i think cj has already cut the check.


    anyway, i beg to differ for two reasons.

    1. I don't like to mess up the smooth flow of checks. If it gets disrupted and something goes wrong, it's a real hassle to keep calling cj to send the check. i experienced that once.

    and 2. that will only work if your next year's income is less than this year. otherwise, you're increasing your already high next year's income. in any business, you can always assume that next year will be higher, regardless of the eventual outcome.

  4. #4
    ABW Ambassador ticketguyz's Avatar
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    Quote Originally Posted by waytogo
    too late. i think cj has already cut the check.


    anyway, i beg to differ for two reasons.

    1. I don't like to mess up the smooth flow of checks. If it gets disrupted and something goes wrong, it's a real hassle to keep calling cj to send the check. i experienced that once.

    and 2. that will only work if your next year's income is less than this year. otherwise, you're increasing your already high next year's income. in any business, you can always assume that next year will be higher, regardless of the eventual outcome.
    1. Why in the world are you not on direct deposit?

    2. It works period. You are deferring the income, and there is no if's about it. You can do the same thing next year and the following, etc., and 10 years down the road when you decide to ditch affiilate marketing you can let the income that was deferred flow into the following year. Think of it this way... say you were to make $25,000 this year with AM, but you defer your December check, which happens to be $10,000 (say you're on a really low-margin PPC-only strategy). You'd then report just the $15,000 and $10,000 would be added to your income next year, unless you then defer again in November-December next year, and keep playing the game until the final year you decide to quit, or in the year your income will be lower (say, because you are starting up a new business that will have big losses in its first year). You cannot and should not always assume that the following year will be higher, or you'll miss out on substantial tax savings (say that $10,000 deferred until next year could be offset against $10,000 in losses from a new biz that normally couldn't have been deducted - you would have just missed out on $3-5k in tax savings). I'm not saying this is the right move for everyone, but it certainly fits my situation.

  5. #5
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    this is gonna be a long story. but i'll try to keep it short.

    in my account, the balance has already been withdrawn for this month. so it's too late now to set the minimum check amount. besides, there must be a minimum time period to do that prior to withdrawal time. so whether cj sends you a check or direct deposit, it doesn't matter.


    why do i use checks instead of direct deposit? for one, i love to kiss my checks, LOL. For me, getting a check and depositing it is a more gratifying experience than by receiving it by DD. I frame the bigger amounts so they can give me more encouragement.

    second, authorizing somebody to direct deposit also authorizes them to direct withdrawal. i don't want surprises. not my type.

    third, if you think banks don't make a mistake, think again. sometimes it can be worst. deposits going to wrong accounts, an employee puting in the wrong computer program. so i don't really do electronics unless i really have to. but that's just my own personal preference. am not saying that you do that. when i buy online, i use my cc with the least credit limit. so if the info gets hacked, the damage to me is minimal.

    as for delaying receiving your income. let's just say you deferred 25% till next year. then next year's deferral will
    be 50% (25% in each year). then continue accumulating 25% over each year. In the fourth year, you have double the income that you should report, which if you report will make you pay more taxes. unless, as i've said, in your fourth year you have no-income or you have a loss. but why on earth would you put money into a business that you expect to lose anyway?

  6. #6
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    Quote Originally Posted by waytogo
    second, authorizing somebody to direct deposit also authorizes them to direct withdrawal. i don't want surprises. not my type.
    Set up a seperate account for your direct deposits only, and ask your bank to set it to disallow withdrawals of any type. Whenever funds come in to this account you can transfer it to another account (which you never give out). You could post your deposits-only account number in Times Square and wouldn't have to worry.

    Quote Originally Posted by waytogo
    as for delaying receiving your income. let's just say you deferred 25% till next year. then next year's deferral will
    be 50% (25% in each year). then continue accumulating 25% over each year. In the fourth year, you have double the income that you should report, which if you report will make you pay more taxes.
    You're not stuck reporting double your income in year four. The 25% would not "accumulate" year over year; it would only be deferred for a maximum of one year.

  7. #7
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    Quote Originally Posted by CrazyCanuck
    You're not stuck reporting double your income in year four. The 25% would not "accumulate" year over year; it would only be deferred for a maximum of one year.
    let's assume that out of 100, you're going to report 75 and to defer 25. For the first year that's exactly what you did.

    But then on the second year, you ended up with 125, which is the 100 for the current year plus the previous 25. you report 75 and defer 50.

    On the third year, you're going to be deferring 75. So there goes the accumulation.


    Now let's go back to what you said about a maximum of one year. As i've said, that's only fine if your 2nd year is less than the first. If the second year is more, you're actually increasing the already high second year income and could actually pay more taxes.

  8. #8
    MasterMike HardwareGeek's Avatar
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    ran this by my accountant and she told me I was stupid

  9. #9
    Moderator MichaelColey's Avatar
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    Time to get a new accountant. Any time you can defer revenue into the next year, you'll defer paying taxes on that revenue until the next year. Besides the caveats mentioned in the original post, there's no downside to this.
    Michael Coley
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  10. #10
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    deferring is different from reducing.

    you can of course defer paying taxes on the 25 this year (see my example) and pay it next year, but does that reduce the total tax you're paying for two years? not necessarily.

  11. #11
    Moderator MichaelColey's Avatar
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    But if you defer again next year, you effectively push it out yet another year. You can do this indefinitely. For instance, instead of:

    Income for next several years: $100k, $100k, $100k, $100k, $100k, $100k, $100k, ...

    If you defer $25k every year: $75k, $100k, $100k, $100k, $100k, $100k, $100k, ...

    Eventually, you'll have to pay taxes on it, but why not put it off as long as possible?
    Michael Coley
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  12. #12
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    Quote Originally Posted by MichaelColey
    $75k, $100k, $100k, $100k, $100k, $100k, $100k, ...
    that applies if you defer the First Year only - indefinitely.

    but if you wish to defer $25k Every Year, you'll be paying on $75k, $75k, $75k, $75k, $75k, ... every year,
    but you'll also be accumulating your deferrals as in $25k, $50k, $75k, $100k, ... over time.


    why not defer?
    well, if it doesn't reduce your taxes or you'll pay more eventually, why even defer?


    remember also that money loses its value as time goes by. your $25,000 thirty years ago can buy more stuff than your $25,000 today.

    the more you delay receiving the money, the more you delay puting it on investment or spending it, the more it will lose its value. The amount that can buy you a house today can only buy you a car tomorrow.

  13. #13
    Moderator MichaelColey's Avatar
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    If you're having the networks hold your December income until January, you're only deferring the income 30 days (15 with LinkShare), but you're deferring the taxes 365 days. If you're in the 25% bracket, that $25,000 at 30 days gives you $6250 for 365 days. If you're earning 5% on your money, that 30 day delay on $25k will cost you $100 but the 365 day delay on the $6250 will earn you $300. If you're earning more or less, the amounts will change but the ratio will be the same.

    Your future value argument doesn't hold water. You're not putting off receiving the $25k forever, just 30 days each year.

    Also, it would be very tough to accumulate deferred revenue like you describe. What the original poster talked about was deferring December income into next year. To defer twice as much the next year, you'll need to defer November and December. At that point, there's little or no advantage because you're losing use of your money for a longer period of time.
    Michael Coley
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  14. #14
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    if you defer your Dec2004 check to tax year 2005 then pay it with TY2005, then you defer your Dec2005 check to tax year 2006 and pay it with TY2006, and so on ...

    then you're still paying for 12 monthly checks a year.

    so where's the tax advantage?

  15. #15
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    i'll tell you what

    what you're actually doing is just changing your fiscal year. Instead of the traditional January to December, you're just changing it to December-to-November.

    at any rate, you're still paying 12 months a year. there is no tax advantage.


    contrast that with shelters like trad ira and roth ira. trad has an indefinite tax payment deferral until taken out, while with roth you pay now but will pay no taxes afterwards. both are not year to year.

  16. #16
    ABW Ambassador ticketguyz's Avatar
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    Quote Originally Posted by waytogo
    if you defer your Dec2004 check to tax year 2005 then pay it with TY2005, then you defer your Dec2005 check to tax year 2006 and pay it with TY2006, and so on ...

    then you're still paying for 12 monthly checks a year.

    so where's the tax advantage?
    The advantage is letting it flow into a year where you're either in a lower tax bracket or where you expect to incur losses (the prime example). You cannot get a credit in taxes if all you have to report are losses, so you could actually offset the deferred income with the losses you incurred elsewhere (subject to some exclusions depending on how the losses were generated). Also, another immediate tax advantage is gained by those people who failed to make estimated payments or withhold enough through W-2 wages, and will thereby incur penalties and interest on the amount not paid to the IRS on time. You have to think outside the box of making the same amount each year via the same sources.

  17. #17
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    Quote Originally Posted by ticketguyz
    You cannot get a credit in taxes if all you have to report are losses
    oh yes you can

    http://www.irs.gov/publications/p535/ch01.html#d0e704

    Net operating loss. If your deductions are more than your income for the year, you have a “net operating loss”. You can use a net operating loss to lower your taxes in other years. See Publication 536 for more information.

    (waiver: this is not a tax advice. you need to go check with your tax advisor)
    Last edited by waytogo; December 17th, 2005 at 03:05 PM.

  18. #18
    Moderator MichaelColey's Avatar
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    Quote Originally Posted by waytogo
    at any rate, you're still paying 12 months a year. there is no tax advantage.
    It's not so much a tax advantage as it is a cash flow advantage. By deferring that revenue for 15 or 30 days (each year), you delay having to pay taxes on that revenue for 365 days (each year).

    It's basically the same as accelerating expenses. Many people will pay expenses in December that aren't due until January or February to get the tax benefit a year earlier. For instance, my property taxes aren't due until 2/28, but I'll pay them by 12/31 to get the tax benefit a year sooner.

    This isn't some new or unusual idea. If you look at the "Top 10 Year-End Tax Tips" on TurboTax.com, deferring income is number 1 (and accelerating expenses is number 2).
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  19. #19
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    Haven't I said this in my original post?

    "Of course, it only makes sense to defer income if you think you will be in the same or lower tax bracket next year. You don't want to be hit with a bigger tax bill next year if an extra chunk of income could push you into a higher income tax bracket."


    I got that from your link to TurboTax.

  20. #20
    ABW Ambassador ticketguyz's Avatar
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    Quote Originally Posted by waytogo
    oh yes you can

    http://www.irs.gov/publications/p535/ch01.html#d0e704

    Net operating loss. If your deductions are more than your income for the year, you have a “net operating loss”. You can use a net operating loss to lower your taxes in other years. See Publication 536 for more information.

    (waiver: this is not a tax advice. you need to go check with your tax advisor)
    Of course you can generate NOLs, but why not time your income recognition properly so as to avoid that? By having deferred income flow into a "loss year" you can offset the losses with income that would have been taxed at 30-40+% as opposed to the possibility of being forced to offset NOLs against a lower percentage (say you end up in the 15% bracket the year after NOLs were generated).

  21. #21
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    Quote Originally Posted by ticketguyz
    Of course you can generate NOLs, but why not time your income recognition properly so as to avoid that?
    because i am not a seer. i cannot predict the future. can you?

    can you say how much money you are going to make next year? and that in order to properly even out your income reporting, you need to defer a certain specific amount for this year.

    it is easy to allocate a NOL against future incomes, but not the other way around.

  22. #22
    ABW Ambassador ticketguyz's Avatar
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    Quote Originally Posted by waytogo
    because i am not a seer. i cannot predict the future. can you?

    can you say how much money you are going to make next year? and that in order to properly even out your income reporting, you need to defer a certain specific amount for this year.

    it is easy to allocate a NOL against future incomes, but not the other way around.
    You don't have to be a seer to know whether you'll be investing heavily in deductible expenses. Why do you think companies spend a ton of money each year on planning the timing of taxable income? It's not a crackpot idea. While this is merely a cash-flow strategy for many, it's a tax-savings strategy for those that know they'll be reporting losses or a smaller amount of income next year. As I mentioned previously, another good reason to defer income is to reduce the amount of penalties and interest that might have accrued because of failure to withhold or make estimated payments throughout the year. This applies to many affiliates who haven't reported self-employment earnings before, and failed to realize the need to make estimated payments throughout the year. Deferring might also help those that didn't plan properly and would otherwise have a large balance due with their 2005 return.

  23. #23
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    Quote Originally Posted by ticketguyz
    As I mentioned previously, another good reason to defer income is to reduce the amount of penalties and interest that might have accrued because of failure to withhold or make estimated payments throughout the year. This applies to many affiliates who haven't reported self-employment earnings before, and failed to realize the need to make estimated payments throughout the year.
    your penalty is based either on this year's income or last year's income, whichever is lower. if you didn't have self-employment income last year, that means you have a zero income last year and your penalty is ZERO.

  24. #24
    ABW Ambassador ticketguyz's Avatar
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    Quote Originally Posted by waytogo
    your penalty is based either on this year's income or last year's income, whichever is lower. if you didn't have self-employment income last year, that means you have a zero income last year and your penalty is ZERO.
    Wrong buddy. Think about those people that leave W-2 based jobs with automatic withholding. Are you saying everyone goes from making $0 one year to being self-employed the next? Wasn't the case for me. You get dinged on overall withholding or estimated payments in comparison to current year or prior year income (you must have withheld or paid 90% of current year or 100% of prior year tax due).

  25. #25
    Member inasisi's Avatar
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    waytogo,

    I see a certain of obstinacy in your replies despite several good points raised by ticketguyz? My CPA repeatedly recommends this approach to delay paying the taxes. I do have a lot more options when I do postpone my income. I can either take it in next year or if need be postpone further till such a point in time that I that my taxes might be the least. I don't see any disadvantage in doing it.

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