Tax Planning for Small Business Owners

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Attention, small business owners. It’s time to take advantage of tax-saving moves before year-end. Whether your business employs one employee or one hundred employees, last-minute tax moves can save you money, if you act now.

Although small business owners shoulder much of the tax burden, they also enjoy more flexibility when it comes to tax maneuvering. That’s why tax planning is especially important for small businesses. Once January 1st rolls around, there’s little else to do but pay-up.

To help you take full advantage of tax saving opportunities, you should meet with your tax professional well before year’s end. In fact, year-end tax planning should be a regular part of your business strategy. Here are some tax-saving tips to consider before the new year.

Defer Income

Reducing your taxes may be as simple as deferring some of your income into next year. A cash basis taxpayer may want to delay client billing until early January, and pay your expenses before year end. Of course, the knife cuts both ways. By pushing income into next year, you may dramatically increase next year’s taxable income, so beware.

If you expect to be more profitable next year, you may be able to eke out some tax savings by doing just the opposite, accelerating income into this year and deferring deductions until next.

Take a Section 179 deduction

Best of all, small business owners should take advantage of the Section 179 deduction which allows you to deduct up to $108,000 for qualifying business equipment purchases in 2006.

Qualifying equipment for this deduction includes office furniture, computers, computer software, and office supplies for your business. However, to take the deduction, the equipment must be operating before year’s end. So, if your office needs a copier, just be sure to have it delivered by December 31st. Plug it in. Make a copy. You can then qualify for the deduction.

Buy Now, Pay Later

Want to buy qualifying equipment but don’t have the money in this year’s budget? Use this time-tested tax tip: charge tax deductible items in December and pay for them in January. You can charge items on your credit card in this year and pay for them next year. However, note that your charges must be on credit cards, not on revolving store credit.

Another way for cash basis taxpayers to benefit from the ‘buy now, pay later’ tactic is to write your checks at the end of December so that they won’t be cashed until next year. Be sure to send your checks by certified mail so you can prove to Uncle Sam they were sent before year’s end. Doing so will allow you to qualify for the deduction this year and pay next year.

Setup a retirement plan

You can secure other tax savings by implementing a retirement plan. Contributions to a profit sharing plan, SEP IRA, or Keogh are tax-deductible for the employer. (Sorry, but unless your SIMPLE IRA was in place by October 1st, contributions won’t qualify this year).

If you are the sole employee of your small business, stashing cash in a retirement fund is an excellent way to reduce your tax liability. Solo 401(k)s permit you to contribute to the plan both as the “employer” and as the “employee.” As the employer you can contribute either 20% of self employment income or 25% of compensation income, depending on the structure of your business. Plus, as the employee, you can contribute another $15,000 ($20,000 if age 50 or over).

Additionally, setting up an employee retirement plan may qualify your business for a tax credit to offset some of the expenses associated with setting up a new pension plan. A tax credit of up to $500 is offered to employers (with 100 employees or fewer) to help defer set-up costs for the retirement plan in its first three years. A retirement plan, other than a SEP IRA, must be established prior to December 31st to reduce 2006 taxes.

Attend the free NAPFA Consumer Education Foundation presentation

For more information about year-end tax planning, you are invited to attend this month’s  presentation. John G. Bowen, CPA, CFP®, AIF®, of Bowen Financial Services, LLC, will be speaking on “Year-end Tax Planning” on December 9, 2006.

The NCEF presentation will be held in the Northside Library meeting room in the Albemarle Square Shopping Center from 12:00 p.m. to 1:30 p.m. All presentations are free and open to the public. You are encouraged to attend and to bring your financial questions.

Tax planning is complex and time consuming. So, make an appointment with your tax professional before the real tax season hits.

Photo by NeONBRAND on Unsplash

Follow David John Marotta:

President, CFP®, AIF®, AAMS®

David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.

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Beth Nedelisky is part of the Investment Committee at Marotta Wealth Management and specializes in trust and endowment management. Born in Africa, raised in Europe and married in the USA, Beth understands world markets first hand.