'Tis the season all right, and not just for holiday parties and yearend bonuses. This is the time to make moves to trim your tax tab. Taking action now can go a long way toward saving you money this year and in years to come. Here are five ways to make tax day less painful
1. HOLD ON TIGHT
Many small business owners pitch their records as soon as they file. That's never a good idea, but it can really cause headaches now that the IRS is stepping up audits of small businesses, says Glenn Kautt, a federally licensed tax preparation expert and president of The Monitor Group, a wealth management firm in McLean, Va. "Collect, categorize, and store your financial records as if you're going to get an audit, because sooner or later you're going to find yourself at the receiving end of an IRS inquiry," says Kautt. The IRS conducts audits in person, over the telephone, or through the mail, in which case you'll get a letter asking you to "send in all your financial records," says Kautt. For any audit, you'll need a minimum of three years of paperwork, and many experts say it is prudent to hang on to your records far longer. Areas that really catch an IRS agent's eye: travel, vehicles, and entertainment.
2. SET THE RIGHT STRUCTURE
If you're a sole proprietor, a partnership, or a limited-liability corporation and net more than $100,000 a year, you could save thousands of dollars in taxes by switching to a Subchapter S structure. Although sole proprietors and partners pay Social Security and other employment taxes equal to 15.3% of the income they receive from their business, owners of S corporations pay employment taxes only on the salaries they set for themselves. Any distributions above those salaries are not subject to employment taxes. That means the owner of a company with profits of $150,000 a year may take $100,000 in salary and avoid the 15% tax on the remaining $50,000 of profit, saving $7,650. Be aware, though, that S corporations have limitations. Profits and losses, for example, must be allocated in proportion to each shareholder's capital contribution, and all shareholders must be U.S. citizens. So talk to your accountant before making a move.
3. SPEED UP YOUR EXPENSES
You'll want to keep money in your own pocket as long as possible, so delay generating income this year by waiting until next year to bill your customers. Or speed up taking expenses to cut your current tax liability. Has inventory been languishing on your shelves a while? Admit that it is not going anywhere, pitch it, and write off the amount you paid for it on this year's taxes. If you've got invoices that are more than 180 days past due and you file taxes for your business on an accrual basis—that is, you record income when a sale is made, not when it is received—accept that those clients are deadbeats.
If your employees need new computers or specialized software programs, buy them now. Provisions in the Small Business & Work Opportunity Tax Act of 2007 immediately increase the expensing limit under Section 179 of the tax code from $112,000 to $125,000, and the phaseout level from $450,000 to $500,000. That means that business owners who purchase assets with a life of longer than one year can expense up to $125,000 this year rather than depreciating the assets over five years. Finally, if your company has a bonus plan, you actually have until Mar. 15 to award those bonuses and still deduct their value from this year's taxes, says John W. Roth, senior tax analyst at CCH, a publisher of tax planning guides in Riverwoods, Ill.
4. GET ALL YOUR GAINS
If you are thinking of retiring or selling your business, consider doing so sooner rather than later. Come 2009, capital gains and income taxes may well rise, particularly if the Democrats take the White House and Congress next year. Some Democratic Presidential candidates have suggested increasing the top income tax rate of 35%—possibly to the 39% it was before the Bush tax cuts—as well as boosting the progressive tax rate on capital gains and dividends, which currently ranges from 5% to 15%. "The years 2009 through 2011 may be a bad time to be taking large gains," says The Monitor Group's Kautt.
5. STASH MORE CASH
Retirement plans come with many tax advantages, so be sure to make the most of them. In 2007, the maximum amount you can put in a defined contribution plan as an employer and employee of your business is $45,000. That rises to $46,000 in 2008. The maximum contribution to a SIMPLE (Saving Incentive Matching Plan for Employees) IRA remains $10,500, but entrepreneurs over age 50 can boost that by $2,500, or dump an additional $5,000 into their 401(k)s. Contributions made to retirement plans can be deducted from your taxable income and grow tax-free until the money is withdrawn at retirement. Owners of profitable businesses with five or fewer employees should consider setting up a defined benefit plan. Although the benefit you withdraw cannot exceed $180,000 in 2007 and $185,000 in 2008, there are no limits on contributions. "You can build up investment savings very quickly," notes Karen Shapiro, chief executive of Dedicated Defined Benefit Services in San Francisco, an online service that administers those plans. Contribute $100,000, says Shapiro, and you may chop $30,000 to $40,000 off your tax bill. The plans do have costs: Shapiro's company, for example, charges $1,250 to set up a plan and $1,600 a year to administer it. But that may be a small price to pay for a cheerier Apr. 15.
Back to BWSmallBiz December 2007/January 2008 Table of Contents