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Many business owners miss some areas in which tax planning could help them save. If you are looking for cost-cutting ideas, here are four tax planning tips that may result in substantial tax savings:
1. S Corporation. Set up an S Corporation to avoid the self-employment tax on profits. Sole proprietors, partnerships, and limited liability companies will pay a self-employment tax rate of 13.3 percent on the first $106,800 of 2011 profits. (An S Corporation is not subject to self-employment tax on the profits earned, but you must take "reasonable" compensation as salary, subject to F.I.C.A.)
2. Bad-debt expense. A reserve for bad debts is not deductible, but you can write off accounts receivable in the year in which they become uncollectible. Be sure to take advantage of all those uncollected accounts at yearend.
3. Home office expense. If you work from home, write off home-office expenses. You can take this deduction even if you use the space for administrative purposes, as long as there is nowhere else you can work. When you use one room in your six-room home as an office, you can deduct one-sixth of your costs such as utilities, security, and homeowner’s insurance, as well as all costs for the room, such as carpeting. Although you can claim the depreciation on the part of your home used for a home office, you should first consult a qualified tax adviser in order to understand the impact it will have on the exclusion of gain when you sell your residence.
4. Travel expense. Deduct business trips by putting your spouse on the payroll. When spouses are on the payroll, even at low salaries, the cost of business trips that include the spouse can be fully deducted. You should be aware that putting your spouse on the payroll in 2011 will double the amount of Social Security tax owed up to the first $106,800 of income.
Whatever your situation, it is important to begin planning for the 2011 tax year to save as many dollars as you can. Make sure to consult a qualified tax adviser to determine if any of these areas are appropriate for you and your business.
Greenstein, Rogoff, Olsen & Co.
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