Q: With the New Year around the corner, do you had any year-end tax-savings ideas?
Gwen S, Millbrook, IL
A: You bet. Because more than half of all tax audits are done on small businesses, it is smart to plan ahead. The fact is, there are several tax-saving strategies that small businesses can legally use to keep Uncle Sam at bay.
Using the Changes in the Tax Laws. A few months ago, President Bush signed into law tax cuts totaling $350 billion. This Jobs and Growth Tax Relief Reconciliation Act of 2003 helped individual taxpayers and also offered plenty for the small business owner.
The best part of the bill is the generous change with regard to the rules for depreciating business expenditures.
Previously, equipment and business assets had to be depreciated over a five to seven year time span. Under the rules however, you can now deduct 100 percent of the cost of almost all new and used assets in the year that you buy them.
Previously, the deduction topped-out at $25,000. But now you can depreciate up to $100,000 for any asset acquired after May 5, 2003. This is a new legal deduction available to you for any major purchase made in the second half of this year.
Buying an SUV: It used to be that a new business car could be depreciated up to a maximum of $7,660 in the first year. While it is nice that the new rules increase this amount to $10,710, the real boon comes if you buy an SUV for the business. If the new car weighs more than 6,000 pounds, you can deduct up to $100,000 for that car in the year you bought it. (Someone has a very good lobbyist!)
Delaying your receivables. If your business expects to have significant income from accounts receivables in the next month, consider delaying those receivables until after the first of the year. Doing so will reduce your business’ taxable net income for this year.
Accelerating your expenses. You might also accelerate some expenses into the current tax year. Expenses that can be accelerated include corporate charitable contributions, 60% of health insurance premiums for you if you are a self-employed individual, year-end employee bonuses, or any other tax-deductible expenses you are planning on making.
Maxing-out your 401(k). Pension contributions are a win-win. They not only lower your taxable income, but they also are tax-deferred until after your retirement. In 2003, the maximum amount you can contribute is $12,000. Can’t afford it? Think again. Because such contributions reduce your taxable income, they sometimes increase your take-home pay!
Deducting your home office. If you use part of your home for business, you may be eligible for the home home-office deduction. Here’s the rule: 1) Your home office must be used exclusively and regularly for your business, and 2) The area must be either your principal place of business or where you meet with customers in the normal course of business.
Leasing your property to your business. If, during the current tax year, your business has been using property or equipment that you own personally, then you may be able to lease these items to your business. You can reduce your taxable lease income by taking any applicable depreciation expense on your personal income tax return.
Speak with your accountant before undertaking any of these moves to make sure they make sense in your specific situation.
On a personal level, if high credit card and car payments have you down, the good news is that you can deduct those payments with some clever accounting. Because home loan interest payments are deductible, consider taking out a home equity loan, paying off the car and credit cards, and then deducting the ensuing mortgage interest payment.