By Christopher Freeburn
The autumn leaves are falling, a chill is in the air, holidays are looming, and, for small business owners, it's a good time to think about ... taxes. While no one likes to ponder the intricacies and implications of the Internal Revenue Code, taking the time to do so toward the end of the year can save your business a considerable amount of money come tax time.
So what can you do now?
1. Lower Revenue. Since your tax bill will be calculated on the basis of how much income your company has made during the year, a good way of keeping that bill down is to defer the receipt of as many payments from customers as possible into January. If your business operates on the cash basis of accounting, this can be easily done by simply delaying the mailing of bills for end-of-year purchases until very late in December, or permitting other bills that are due to be paid in January. Not only does this allow you to lower the current year tax bill, but you get to keep the tax due on those funds in the bank, accruing interest, for a whole year. Additionally, your customers will appreciate the added time to pay their bills, especially around the holiday season.
Note, however, that this strategy only benefits you if you won't be entering a higher tax bracket in the coming year. If you estimate that your business will be operating in a higher tax bracket next year, deferring payments until next year may cost you more later. Also, if your business shows a loss for this year, it makes less sense to defer the payments, since doing so only increases the size of your loss for this year and will have no tax impact.
Also note that simply not depositing a check received before the end of the year does not mean that you can defer that revenue to next year. The IRS requires you to include any checks received before December 31 as part of this year's revenue. Failing to do so could result in penalties if you are audited.
2. Make that major purchase. If you are considering a major purchase of business equipment, it's a good idea to do it now, so that the cost can be deducted from this year's taxes. As part of the Economic Stimulus Act of 2008, signed into law earlier this year, the limit on Section 179 deductions for business equipment purchases was raised from $125,000 to $250,000, and the total amount of equipment purchases that are deductible was raised from $500,000 to $800,000. Both used and new equipment qualify for the deduction and you are able to finance the purchase. But any new equipment acquired must be put into use by your business by December 31 to qualify for the deduction.
3. Increase Expenses. You can reduce your tax bill by increasing the amount and number of deductions you take for business expenses like office supplies and office furniture. You can increase the benefit by charging such expenses on your business credit card, which means that-if you make the purchase in December-you get to claim the deduction for this year's taxes, but won't have to pay the credit card bill until next year.
4. Pay Recurring Bills Now. The same applies to bills for business services, like rent, phone service, and equipment leases, which should be paid before the end of the year, even if not due until after December 31. Consider pre-paying for bills that you know you will need to pay anyway like rent. Such payments can be deducted against this year's taxes. Make sure that pre-payments made now won't complicate your cash flow in January.
5. Contribute to a Retirement Plan: If you don't have one, you really should, and this is the perfect time to set it up. Payments made to a retirement plan-401(k), IRA, KEOGH, or SEP plan-are deductible against this year's income. Most retirement plans have a contribution limit.
6. Consult a Tax Advisor. Tax law is complicated. Very few small business owners, outside of CPAs themselves, have the time or inclination to acquaint themselves with the IRS code and the yearly changes made by Congress. Instead of trying to work it all out yourself, you are better off consulting someone who has made business taxes his or her profession. A tax advisor can make certain that your business is not only in compliance with all the relevant tax codes, but is taking advantage of every allowable deduction.
7. Consider the home office deduction. Do you conduct business out of any part of your home? Many small business owners have at least one room devoted to some aspect of their business, whether it is keeping shipping materials in the garage, or a bedroom that has been converted into an office or filing storage space. With so many small businesses operating partially or completely out of people's homes, the IRS allows small business owners to deduct a portion of rent, mortgage payments, utilities, and maintenance for qualifying home offices. The IRS has fairly stringent tests for such deductions, however, and it is advisable to consult a CPA about your particular situation to make certain it qualifies.