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SBC Team

Seven Year-End Tax Tips

Posted by SBC Team Dec 2, 2008

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.

 


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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.
Part 1: Checks

 

By Christopher Freeburn

 


Paying the bills doesn't make anyone's list of favorite things to do. But, like it or not, bills come due and must be paid. No one knows that better than small business owners, who face a myriad of bills every month, ranging from office supplies and equipment leases to office rent, insurance, and marketing services.

 


Small business owners not only have to pay their bills, but do so in a way that lets them best manage their company's cash flow, insuring that there will be enough cash available to the business at any one time to meet all immediate obligations. In order to achieve this, small business owners must choose between the available payment options to select the one-or the combination of several-that best serves their business's needs.

 

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The paper option

 


By far the most popular way for small businesses to pay their bills is the simple, old-fashioned paper check. Drawn against a bank account, checks have been the primary means of bill payment for both small businesses and consumers for decades. But that is now changing.

 


"Checks are facing stiff competition from other forms of payment," says Jim Sheridan, a Boston-based banking consultant. "Credit cards and electronic payment systems are growing quickly. Most businesses still use checks to pay bills, but the trend is definitely heading toward plastic and electronic payment systems. The last stronghold for paper checks are bills that are sent through the mail, but even there we are beginning to see movement away from paper checks."

 


Nevertheless, checks remain a popular method of bill payment by small businesses for good reasons. "There are some advantages to using checks over credit cards of electronic payments," says Sheridan.

 


Floating money

 


Paper checks still offer small businesses a short period of time between when a check is written and when the money is actually transferred out of the issuing business's account, often referred to as "float." During this time the money is still available to the business, and depending on the type of checking account, may still be collecting interest. This float period varies based on a number of variables. A check sent to a utility company, for example, will be marked as received when the check arrives in the mail, but the utility may not send the check to the bank for several days.

 


The leeway provided by float periods is decreasing, however. In 2004, Congress passed a law permitting banks to send electronic images of checks to each other instead of having to send the actual checks for processing. Under the law, electronic scans of paper checks became equivalent to the actual checks themselves. Since electronic transmission of scanned checks is significantly faster than actually shipping paper checks back and forth between banks, float times have fallen considerably as more banks adopt the system.

 


Accounting and control options

 


The traditional paper check also provides definite accounting advantages since the check itself becomes physical proof of a transaction. It is difficult for another party to dispute the receipt of payment if you have a copy of the cancelled check. In recent years, many banks have moved away from returning the actual cancelled checks along with your monthly account statements in favor of printed images of the checks. "It is far more cost effective for banks to print a scanned image of the cancelled check on your statement than it is to physically send you the actual check," explains Sheridan. "Both in terms of the resources needed to transport the actual check to your local bank and then send it out and the mailing costs of doing so." The scanned images on your monthly statement, however, still constitute valid evidence of a completed transaction.

 


Checks also allow a small business owner to change his or her mind and cancel the payment, even after the other party has received the check. A "stop-payment order" placed on a particular check will cause the bank to decline it. This ability can prove useful to small business owners if a given good or service is found unacceptable after the check has been written. However, most banks charge a fee for a "stop-payment" order, and stop-payment fees are usually among the highest charged by most banks, ranging from $15-$35 per stopped check. "Stop payment fees are like an insurance premium for the bank," explains Sheridan. "If you issue a stop payment order on a check and the bank accidentally pays the check-which does occasionally happen due to miscommunications-then the bank is liable for the amount of the check, not the customer."

 


Disadvantages of checks

 


The once unassailable dominance of paper checks as a means of paying bills has been eroding because of the clearest advantage of credit cards and electronic payment methods: cost.

 


Depending on your bank and type of account, your bank may charge you a small fee for processing every check you write. Purchasing blank checks also requires paying a fee (again, depending on the bank and type of account). These fees can add up.

 


Additionally, paper checks need to be physically presented to the payee. For the most part, that means sending them in the mail. With postage costs rising sharply over the past few years, small businesses that mail a lot of checks are beginning to notice the cost. "Rising postage prices are a significant reason why so many businesses and consumers are turning away from paper checks for regularly recurring expenses like credit card and utility bills," Sheridan observes. "Equally, it takes a lot less time to pay these bills electronically and avoid the bother of writing a check and mailing it." Credit card and electronic payment systems can also be set up to pay bills automatically at a specified time each month, thereby eliminating the possibility that a payment would be forgotten or lost in transit, which might result in penalty fees or loss of service.

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