Long before David Ives appropriated the phrase "All in the Timing" for the title of his collection of one-act plays, some professor or director probably confided to you that it is the secret to performing comedy.

At the same time, accounting professors and mentors were solemnly telling me that it is also the key to tax planning.

And guess what? They are both right. To paraphrase an old joke, timing may not be everything, but it’s way ahead of whatever is in second place.

Least and Latest Principle

From a purely economic standpoint, the best planning allows you to pay the least amount of taxes permitted by law at the latest date the law allows without incurring penalty or interest. The reasoning behind "least" is obvious. "Latest" is a little subtler, since it involves the Time Value of Money. That’s not a book sold on late-night television. Rather, the time value of money recognizes that being able to defer a payment is worth something. In its simplest form, the time value is the interest the money will earn staying in your bank account the extra period of time. But the concept is economically valid even if you do not have a specific, identifiable cache of money in mind.

In tax planning (indeed in all financial planning), the choice is rarely "pay it now or pay the same amount later." More typical is "pay a smaller sum now or a larger one later." The size of that difference is best evaluated by quantifying it as an interest rate, and comparing it to competing uses of the money. You may be used to comparing the interest rates on credit cards to decide which one to pay off first; this merely extends that logic to comparing the cost of deferral (interest you would pay) to the interest the money might earn.

What Has This To Do With You?

All other things being equal, the basic idea of year-end tax planning is to accelerate your deductions and defer your income.

Accelerating deductions is often easier because you can control your spending. (If you can’t control your spending, you have a different problem altogether.) Should Santa forget to bring you that new computer, you can buy it Dec. 27 instead of waiting till Jan. 3. You can pay tuition for the January scene study class now. Don’t wait till you get back from visiting your family to make that contribution to Season of Concern. And if you itemize your deductions, consider paying the fourth quarter state income tax estimate payment (due in January) before year-end.

If you are strapped for cash until January, you can put deductible expenses on your credit card and take the deduction this year. Technically, you are borrowing money from the bank that issued your card to pay the merchant. As long as the transaction date on your bill is December, that is this year’s expense.

Deferring income can be tougher. If you are selling stock at a profit, you control when the sale occurs. If you are selling real estate, the buyer will usually have enough flexibility that you can postpone the closing till January. Actors and freelancers, however, often do not know when they are going to get paid until the check arrives. Payers, of course, are also trying to accelerate their deductions, and it is not unusual for checks dated Dec. 30 to arrive in January. You received the income in January, so it is properly 2003 income. Unfortunately, the payer will include it in your 2002 form 1099.

You are not necessarily stuck accelerating the income in that case. The IRS will add up all the 1099s and compare that total to the income on your Schedule C. If you have fee income for which you did not receive 1099s (because the payment was under $600 or the payer just failed to do it), the total reported income could well be more than the total of all the 1099s even after leaving out that check. Otherwise, you have to attach a schedule explaining and reconciling the data to your tax return, and that’s not worth it for small amounts of money. And, of course, do not forget to include that check when you tally up your 2003 income.

But it Might Not Be a Good Idea

What if you know your income will go up next year, or you have a strong expectation that it will? Maybe you have already been cast in a film that shoots in the spring, or a tour that goes out in February. Next year’s income, then, might be taxed at a higher rate. If the income you defer would have been taxed at 10 percent this year and instead is taxed at 27 percent next year, you have paid a steep price for waiting a year.

The problem is, how do you know? It’s no secret that 2002 has been a stinky income year for actors and others in the performing arts here: little feature film work, not much commercial production, the loss of industrial acting work (and day jobs) with the collapse of Andersen and so on. If next year has to get better even if it means taking a permanent "civilian" job, then maybe you should go ahead and pay the tax now.

Psychologically, that can be hard to accept. Coming off a bad year, you understandably want to hold on to whatever cash you do have and may be salivating over a possible tax refund. But in this, as in the stock market and retirement planning, you need to take the long view.

Oh. You’re not taking the long view there either? That’s another column for another time. Happy New Year.

Are there money or tax questions you would like to see discussed in this column? Let me know, at 2835 N. Sheffield, Suite 311, Chicago, IL 60657, or call 773/525-1778 (888/525-1778 toll-free outside the Chicago area).

Greg Mermel is a certified public accountant whose clients in the arts range from individual performers to major theatre companies and suppliers. He also sometimes produces theatre.

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