Tips for Yearend Tax Planning

Consider a few new wrinkles when preparing your 2008 returns. A CPA offers practical tips on depreciation, vehicle costs, and other items

By Karen E. Klein

The conventional wisdom on yearend tax planning is to accelerate deductions and defer income. But 2008 may be the year conventional wisdom gets upended. CPA Michael Hanley, of Merl & Hanley in Smithtown, N.Y. offers seven tips to keep in mind over the next six weeks.

1. Book a tax-planning meeting or phone call with your accountant to devise a yearend strategy specifically for your firm. Why the need for fine-tuning? Some small companies' revenues are down for 2008, not because their business has declined but because pinched customers are paying their bills more slowly, Hanley says. That means additional revenue will trickle in as late payments during early 2009—just when tax rates may go up under a new Presidential administration, he says. "Some companies may have the equivalent of 10 months of income this year, and 14 next year. That means they may not want to defer additional income into 2009," he says.

2. Take advantage of bonus depreciation. For qualified assets placed in service in 2008, you may claim an extra 50% deduction in addition to normal depreciation and deductions available under the Internal Revenue Code's Section 179. The Section 179 "expensing" deduction allows a business to write off the full cost (rather than depreciating it over several years) of certain business assets, including machinery, vehicles, equipment, and computers, up to a certain dollar level. For 2008, the maximum deduction limit was increased to $250,000, Hanley says. Note that the asset must be "placed in service" in 2008: That means you can't deduct the cost of a computer system you've ordered but that won't be operating in your office until January. "If you need a piece of equipment, make the purchase and get it working now," Hanley says. "People looking to hit their sales quotas for the end of the year are definitely going to be offering some good deals."

3. If you have a vehicle that you use both for work and business, increase your business driving and decrease your personal driving to get the most out of the tax deduction for personally owned vehicles. "If you've driven a total of 10,000 miles by the end of the year, and 6,000 were business miles, while 4,000 were personal miles, you can take 60% of the other vehicle expenses, like oil changes and maintenance, as a business deduction," Hanley says.

Alternatively, you can choose to take the standard mileage rate for 2008. That was 50.5¢ per mile for the first half of 2008 and 58.5¢ per mile for the second half. (Only small business owners that file Schedule Cs, such as sole proprietors, are allowed to choose which way to take their vehicle deductions, Hanley points out.)

4. If your company operates on the accrual basis for tax purposes, fix your employees' bonus amounts before Jan. 1, but pay them early next year. Generally, the bonuses aren't taxable to employees until 2009, but they can be deducted on your company's 2008 return so long as they're announced in 2008 and paid by Mar. 16, 2009, Hanley says.

5. If you're doing major renovations at your business location, make sure you schedule repairs and maintenance jobs separately, Hanley says. "Capital improvements aren't deductible as business expenses, like basic repairs are. Instead, improvement costs are added to the 'basis' of the property for tax purposes." Lumping all the work into one project could cheat you out of 100% deductible business expenses.

6. Keep detailed records of collection efforts that will support any deductions you take for bad debt that becomes worthless in 2008. If you can't get one of those pinched clients to pay up, you can write the amount off provided you can show you made a good-faith effort to collect the debt. That means keeping records of telephone calls, letters, and other efforts you've made to get the money, including hiring a collection service (BusinessWeek.com, 7/11/08).

7. If you've had a good year and you need to increase your deductions for 2008, consider rescheduling business trips planned for early next year into December, Hanley says.

Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.