Here are some ways you can make the most of the time you have left to secure tax advantages prior to the end of the year:
Section 179—This piece of tax code continues to be a boon for small business, especially since it’s been extended through 2010 (see “Tax Changes for 2006” in this issue). For 2006, the deduction lets you immediately take $108,000 off your taxes, provided your total purchase is under $430,000. If you need new (or even used) equipment, hardware or off-the-shelf software, the Section 179 deduction can help. And the deduction will be increased for inflation in 2007. “One thing to keep in mind is that if the Section 179 deduction puts you at a loss, it can’t be taken,” says Mailhes. “Since it’s elective, you’ll likely take the standard depreciation in that case, regardless.”
One note: You can claim depreciation deductions only for the business-use percentage of an asset’s cost. For example, if you use a vehicle 50% of the time for business and 50% for personal purposes, you can depreciate only 50% of the cost. If your corporation owns heavy SUVs, pickup trucks or vans, each must be used more than 50% for actual corporate business activities—based on mileage—to qualify for the write-off. Personal use by an employee who owns more than 5% of the company’s shares, or by employees related to the shareholder, doesn’t qualify as corporate business use, although the personal-use value must be reported as additional taxable compensation on your W-2.
Increase those expenses—In addition to Section 179 benefits, paying as many expenses as possible before year-end offers benefits. Stocking up on office supplies, paying bills early (e.g., utilities, rent, insurance, etc.), buying office equipment now, covering repairs and even booking travel before December 31 all help to reduce your tax burden.
Deferring income—If you can put off some of the accounts receivable you expect to come in during December to the first week of January, you can cut your tax bill, as you won’t have to report taxes on that income until the following year. “If you’re on a cash basis and you’re growing, it makes sense to pay everything down at the end of the year and try to defer what you can into the next year to lower your taxable income,” Mailhes adds.
Take advantage of tax credits—Tax credits are even better than deduction because they represent a direct dollar subtraction from your taxes. (To learn more about available tax credits, read “Making the Most of Tax Credits” in the March 2005 issue of Wells Fargo Business Banking Roundup™ newsletter.) There are up to 25 federal tax credits, not to mention those available from your state. Talk to your accountant or CPA about what may be available to you.
Take advantage of new deductions—“If you’re a manufacturer, for example, you can take advantage of the New Manufacturer/Producer Deduction, which allows you to deduct 3% of your net profits from manufacturing,” observes Mailhes. “It will go up to 6% in 2007.”
Put retirement plans in play—If you haven’t yet set up a retirement plan, you still have time to do so and reduce your income for the year. You can install almost any type prior to the end of the year—SEP, 401(k), Roth IRA, KEOGH, etc.—with the exception of a SIMPLE IRA, which has an October deadline. “For those planning to file for an extension (either September 15 or October 15, 2007, depending on the structure of your company), this can be especially attractive,” Mailhes says. “You can still set up the plan this year and not pay into it until the due date of your return. So if you buy inventory or equipment, or have some other capital expense at the end of 2006, the extension can really help out in terms of cash flow; you may delay funding the plan until 2007. As long as you setup the plan up before year-end, you still have until your filing deadline to contribute.” One note: Some 401(k) plans allow catch-up contributions in December. If you haven’t yet maxed out your plan, this is a good time to do it.
Write off worthless inventory and Accounts Receivable—“If you have inventory that’s damaged or won’t sell, or certain accounts on which you know you can’t collect, you can write them off,” says Mailhes. “Bear in mind that you need to record the specific items or accounts you’re writing off.”
Exercise your plastic—If you’re using cash-based accounting, business expenses paid via credit card in December can help reduce taxes. You’ll have write-offs for 2006 on bills that won’t be paid until 2007.
Be charitable—What you can write off in terms of charitable donations is limited by your adjusted gross income (AGI) before net operating loss carry forwards. It can range from 20% to 50% of AGI for individuals (generally, you can deduct cash donations in full up to 50%, property donations in full up to 30% and donations of appreciated capital gains assets in full up to 20%). For corporations, the amount is limited to 10% of your taxable income. In addition, if your itemized deductions are greater than $150,000, any amounts greater than that will be reduced by 3% of your AGI. Just remember that the IRS requires you to have a written receipt for any donation of $250 or more. If you did not receive a receipt for a donation, you should contact the organization and request written documentation. If you made any non-cash gifts (e.g., stock) worth $500 or more in total, you must file a Form 8283, Non-cash Charitable Contributions, with your tax return to claim a deduction.
