To help minimize your tax bill for 2010, I may be able to identify some opportunities for you to defer income to next year or prepay some of next year’s expenses so that you can take a deduction in 2010.
Taxes are the biggest expense for most Small Businesses and Individual Professionals. And yet most of us provide minimal time for planning and reducing this expense, except perhaps an annual visit to your tax guy’s office during tax season. Is it any surprise then that Small Businesses and Professionals contribute the most to Tax Revenues?
Large Corporations with help from expert tax professionals pay at a much lower effective tax rate. An extreme example is that of Goldman Sachs which paid an effective tax rate of 1% on a $2.3 Billion profit last year. Independent studies over the years suggest that Small Businesses pay up to $160 Billion in excess taxes each year. This is money you can save through proper tax planning. As with everything else in your business, it takes careful planning and professional execution.
There are over 350 Tax Deductions and Credits for Small Businesses and Individual Professionals. Although it is almost impossible to say how many of these may be applicable to your specific business without considering your particular scenario, here are some very common deductions that may apply to you.
1. Start-up Expenses
As you get your business started, there are several costs such as furniture, equipment, Computer, Fax etc that may be deducted 100%. Section 179 of the Internal Revenue Code allows you to deduct up to $250,000 of the cost of new equipment or other assets in 2010. Off the shelf Software costs can also be now deducted in the same year as per Section 179.
Although if you know that your business is going to take a couple of years to break even and generate profit, you may want to depreciate these expenses over the years to offset the profits in later years.
2. Business Travel, Meals and Entertainment
If you make a trip for business purposes, travel costs including Airline tickets, Hotel, Taxi, Meals, Shipping business materials, Laundry, Telephone calls, etc are fully deductible expenses.
How about combining business travel with pleasure? It is allowed, as long as the primary purpose of the trip is for Business, although there are strict guidelines on this.
3. Charitable Contributions
This is a great deduction as you can feel good about donating to your favorite cause and save on Taxes at the same time. Charitable contributions are treated slightly different depending on the type of your business entity. If your business is a partnership, a limited liability company, or an S corporation, your business can make a charitable contribution and pass the deduction through to you, to claim on your individual tax return. In case of regular (C) corporations charitable contributions are deducted on the corporation's tax return. There are some important rules for charitable contribution deductions:
- Only contributions to charities listed as ‘qualified organizations' by the IRS are deductible and contributions more than $250 require a written acknowledgement from the qualified charitable organization.
- You can deduct donations of assets such as Property or Equipment at their fair market value. Although a fully depreciated (written off) asset cannot be deducted as a contribution even if it is works well.
- You cannot deduct the value of time or services that you volunteer.
- You cannot deduct the part of a contribution that benefits you. If you receive a gift in exchange for a charitable donation or if the contribution made is in lieu of certain benefits, you can deduct only the amount of the contribution that exceeds the value of the gift. If you are making a large donation, make sure you check with your tax accountant first.
4. Bad Debts
Bad Debts hurt the most. Especially when you have worked so hard to satisfy all of the customer's requirements and they do not pay you. The good news is that certain bad debts are tax deductible.
If your business sells goods, you can deduct the costs of any goods sold, but not paid for, as an ordinary business expense. However, you cannot deduct any lost profits you would have collected from the sale. If your business provides services, no deduction is allowed for the time you devoted to the customer who doesn't pay. For example if you provide medical services and the patient does not pay, you cannot deduct the cost of the time you spent in treating the patient. The rationale is that if businesses were able to deduct unpaid services, it would be quiet easy to inflate the unpaid bills and claim large bad debt deductions making it hard for IRS to catch the fraud.
5. Home Office Deduction
For many years taking a Home Office Tax Deduction was considered a red flag, inviting the IRS to Audit your tax return. But that may no longer be the case, with more and more businesses and individuals taking advantage of working from home and maintaining a healthy work-life balance. IRS is well aware of the rising trend in working from home office. As long as you use the ‘Home Office' as IRS defines it. This one deduction alone can save you several thousand dollars in tax.
For example if you are an independent Information Technology contractor and mostly work out of your client's office, however you use part of your home to manage the administrative aspects of your profession or business, you may qualify to take the Home Office deduction. IRS has specific rules to qualify to deduct expenses for home office. I want to share the two most basic qualifiers.
Trade or Business Use: First of all you must be engaged in a trade or business to take advantage of this deduction. Employees can also take Home Office Deduction in certain situations. You cannot take a deduction if you are only using it for a profit seeking activity that is not your trade or business. For example you use part of your home to review investment journals and carry out your personal investments. You are not a broker or a dealer, so your activities may not be considered part of a trade or business and hence you cannot take home office deduction.
Regular and Exclusive Use: Specific area of your home must be used exclusively and regularly for your business or trade. You don't need a permanent partition to mark the space. For example you use part of your basement exclusively to perform administrative and management tasks of your business, review business paperwork, teleconference or meet with clients etc. on a regular basis and not just once in a while. Your family does not use the same space for recreation or other non-business purposes. You may be able to claim costs associated with part of the basement as a deduction for use as home office, provided you qualify on other rules.
There are other rules and definitions that IRS uses to qualify the Home Office deductions. If you are planning to take advantage of this deduction, I strongly recommend you visit with us. Which leads me to....
I strongly encourage you to visit with us this month to talk about your taxes. A chance for us to visit and discuss your current tax situation. We can estimate your 2010 tax liability and make recommendations now, while there is still time to take action. Please take a minute to call our office today to make an appointment. Set aside 30 minutes. Plan on saving money.
Our 29th version of the same story.
Sally Smith, was a smart businessperson, she knew the basics of year-end tax planning.
1. Postpone income to next year.
2. Pay as many expenses as possible this year.
3. Keep inventory level low.
4. If you are going to make a capital investment, do so before the end of the year.
5. Double check for missing deductions.
6. Invest in an IRA for similar type account.
Sally owns a retail store and faced the year end with her eyes wide open. Sally knew that a few strategies would pay big dividends on April 15. Here is what she did to reduce her tax liability:
Since Sally was operating her business on a cash basis and relied upon cash sales through her cash register, she did not have the opportunity to postpone much income. She has established a policy for many years to close her books on December 28, which gave her opportunity to defer three days of sales to next year.
Sally then reviewed her bills. She started to write out checks for her expenses. She wrote checks for all expenses due, even if some expenses were due in January. She dated her checks for December 28, 2010 to be sure that the expenses were recorded for this year on December's bookkeeping. Her checks written totaled to almost $10,000. Her one simple strategy, accelerating expenses meant that Sally saved over $4,000.00 in income tax this year.
Since you pay tax on your inventory at the end of the year, Sally knew that reducing her inventory to the lowest amount possible was important for her. First, she decided to review her inventory to see if she had things that have been gathering dust. She found items that in fact had been sitting around for more than three years. She decided to mark those items down and immediately started an inventory reduction sale for those items. She knew that the value of her inventory was based upon her costs of the items, not the selling price. She also knew that items that were partially used or supplies not for resale did not count as part of her inventory.
Sally had been debating whether to purchase a new computer for her business. The local computer store was offering a "six-months same as cash" financing offer for the purchase of new computers. Sally decided to purchase the computer now, electing to take advantage of the special financing offer. She knew that she could deduct the full purchase price of the computer on her tax return, even though she did not pay for it right away. When you purchase something using a credit card or borrow the money, as Sally did, you get to deduct the amount when you purchase the item. The $3,000 computer saved Sally $1,200 in income tax.
As part of her year-end review Sally took a minute to see if perhaps she has recorded all her business expenses as part of her monthly record keeping. She knew that the credit card that she had been using exclusively for business had some interest payments that were not included. She made a note to record her year-end statement from her credit card company to make sure that it was included as interest paid on her year-end documents to her accountant. In addition, she decided to review her automobile mileage and other receipts for expenses that she might not have had for her business and had a chance to record in her monthly record keeping.
Sally also knew that she had time to make her annual IRA contribution until April 15 of next year. She decided not to make it till next April. She also made a note to talk to us about Roth IRA accounts and analyze the different options available to her. One of her options was a self-employed Pension Plan commonly called a SEP. IRA's. SEP. IRA's do not have to be opened or funded until the due date of your return. That means that Sally doesn't have to open or make a contribution to a SEP. IRA for the 2010 tax year until April 15, 2010. She can also contribute a larger amount to her SEP. IRA than she could to her regular IRA. However, she was reluctant to open one because she also knew that she would have to contribute an amount to her full time employees. She made a note to ask her accountant what that contribution would be and what her resultant tax savings would equal. She also thought her accountant might have ideas on how to "cushion" the employee's contribution issue.
Sally knew that her year end review of her tax situation saved her almost $7,000 this year. She made a note to review her year end information before we prepared her tax return in 2010.
SAVE TAXES...REMEMBER BEFORE JANUARY 1, 2011
1) Postpone income to next year.
2) Pay as many expenses as possible this year, even if you do not send the checks off till January, be sure to write the checks for the expenses.
3) Keep inventory at a low level.
4) If you are going to make a capital investment, do so before the end of the year.
5) Double check for missing deductions.
6) Invest in an IRA or similar type account.
Please note our office will be closing or have early closing times for the following days:
Friday, December 24, 2010 in observance of Christmas Eve.
Saturday, December 25, 2010 in observance of Christmas.
Friday, December 31, 2010 at 1:00 p.m.
Saturday, January 1, 2011 in observance of New Years Day.
Extended tax season hours start January 19, 2011. We will be open every day until April 18, 2011. IRS has extended the due date for your taxes this year because of the District of Columbia Emancipation Day holiday falling on April 15, 2011.
We are awaiting word from the IRS on the exact amount of taxes they will be required to withhold from your employee paychecks in 2011. The tables generally are released in mid-November, but they are being held this year because of the unresolved issue of the Bush tax cuts. Experts have been predicting that at some point the IRS will have to assume the Bush tax cuts expire and issue new tables, because payroll processing departments require two to three weeks on average to program their computers with new data.
But IRS doesn't seem hurried.
"We understand that businesses and payroll processors need at least a few weeks to implement new withholding tables, and we are hopeful that Democrats and Republicans in Congress will work together to extend tax cuts for 98% of American families and provide the middle class the tax relief they need in these tough economic times," said Treasury spokesman Sandra Salstrom.
Once again, thank you for choosing me as your tax guy. If you have any questions about your tax and/or financial situation, please don't hesitate to contact me. I look forward to hearing from you.
My very best wishes for a happy holiday season and for health and happiness in 2011.
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