It’s been a pretty good year. The economy is strong and profits are healthy. Now it’s time to work on reducing the tax bite. Here’s how smart business owners whittle it down. They’re making these moves before Dick Clark counts it down.
Set Up a Tax-Favored Retirement Plan
The most effective way to shelter income from taxes is by funding retirement accounts, and business owners now have better retirement plan options than ever before. The key is to get started. To reduce 2006 taxes, set up your new plan before year-end. Here are some popular options:
SEP
The Simplified Employee Pension (SEP) plan will allow you to contribute and deduct up to $44,000 this year.
Solo 401(k)
May allow you to contribute and deduct up to $49,000 this year.
Defined Benefit Pension Plan
This plan gives you the potential to contribute and deduct more than any other. The exact amount depends on factors such as your age and income.
Note that although these plans offer powerful tax-reducing and wealth-building benefits, they do contain rules and complexities. For example, some require that you open the plan to employees. Talk to your financial advisor.
Delay Revenue and Maximize Expense
By doing either one, you’ll reduce current-year book profit and thereby lower your 2006 tax bill. Here’s how:
- Delay shipments until January 1. You’ll reduce current-year profit (assuming the jobs are profitable).
- Delay invoicing. Many companies simply recognize revenue when the invoice is cut. Delay invoicing and reduce current-year profit.
- Record all payables before the new year. Don’t allow payables to sit in the inbox unrecorded.
- Arrange for vendors to deliver any invoices “in their system” before year-end, especially large invoices.
- Accrue (record) all unrecognized obligations such as earned-but-unpaid wages and bonuses.
Purchase Equipment and Software
Most small businesses are eligible for the “Section 179″ deduction. For tax years beginning in 2006, you can immediately deduct up to $108,000 worth of business equipment – as long as it’s up and running by year-end. That equipment can be new or used. Software costs qualify. Business-use vehicles also may qualify, but there are special rules for vehicles. See below for treatment of “heavy” vehicles deemed to be SUVs. Heavy vehicles NOT deemed to be SUVs are treated like other types of equipment for section 179 purposes (and that’s a good thing).
Buy a Qualifying “Heavy Vehicle” SUV
To the extent that you don’t use all of your $108K section 179 allowance on equipment and software, consider buying a new SUV before year-end to take up the slack. Be sure it’s rated 6,000 pounds or more.
New laws limit the Section 179 amount you can take from the purchase of an SUV to $25,000, but you can take that PLUS regular first-year depreciation on the cost left after the first deduction.
For example, say you spend $60,000 on a new Toyota Land Cruiser that will be used 100% in your business. As long as you make the purchase before the year’s over and use the new vehicle for business before then, you generally can claim the following deductions on your business’ 2006 federal return: the $25,000 Section 179 deduction plus $17,500 of bonus depreciation plus another $7,000 of regular depreciation. These first-year deductions come to $32,000. At a 35% tax rate, thats an immediate $11,200 tax savings!
But be aware that you can claim depreciation deductions only for the business-use percentage of an assets cost. For example, if you use a vehicle 80% for business and 20% for personal purposes, you can depreciate only 80% of the cost.
The Section 179 deduction cannot exceed your business taxable income (calculated before the Section 179 write-off). For 2006, the deduction is phased out if your business acquires more than $430,000 worth of assets that would otherwise qualify for the Section 179 write-off.
When a heavy SUV, pickup or van is owned by your corporation, it must be used more than 50% for actual corporate business activities (based on mileage) to qualify for the Section 179 write-off. When the over-50% business-use test is failed, your corporation must depreciate the vehicle using the straight-line method (in which case it will take six years to write off the cost completely).
Offset Investment Gains and Losses
Investment losses are not tax-deductible but can be used to offset taxable gains. If you have sold investments in 2006 at a loss and have other investments – such as stocks – with paper gains, consider selling and taking a gain equal to the loss. The gain thus will be shielded from taxes. The reverse also holds true. If you have realized gains during 2006, consider selling some losers to offset the gain. Be alert to short- and long-term issues. Short-term gains are taxes at ordinary income rates. You’ll need short-term losses to offset short-term gains, but short-term losses can also be applied to long-term gains.
Spend Unused FSA/HSA Dollars
If there is any money left in your flexible spending account, spend it by year-end or lose it. So go get that checkup, procedure, prescription refill, new set of eyeglasses, etc.
Manage the AMT
If your income is above $75,000 and you have significant write-offs for personal exemptions and took (or are considering taking) some sizeable capital gains, talk to your financial advisor. You could be facing a big Alternative Minimum Tax (AMT) hit.
This article originally appeared in The Business Owner Journal, the periodical of choice for owners of small and midsize private businesses. All rights reserved, D.L. Perkins LLC. © 2012.
This publication is intended to provide general information on the subject matters covered. It is sold and distributed with the understanding that neither the publisher nor any distributor or advertiser is engaged in providing legal, tax, insurance, investment or other professional advice. The advice of a qualified professional should be sought before any reader applies a concept presented herein to his or her particular situation or business.
D.L. Perkins, LLC is solely responsible for this content.
