11/ 21/ 2005
by Barbara Weltman
Last-minute tax moves to make before Dec. 31
Though 2005 is winding down, there is still time to minimize your tax exposure. While tax planning should be customized for your situation and should not be the driving force for your actions, there are certain generalizations that may be helpful to follow:
1. Defer income to 2006. If you use the cash method of accounting, delay year-end billing for work completed this year so that you’ll receive payment after the close of 2005, postponing the time for paying taxes on this income to next year.
2. Accelerate deductions into 2005 that might otherwise be taken next year. For example, buy needed supplies and equipment, and make charitable contributions.
3. Fill your supply cabinet now with items you’ll need next year and claim a deduction this year. Smart buying can save you money on the cost of the supplies as well as on your taxes. Now is also a great time to upgrade your equipment—computers, telephone systems, office furniture or machinery for business. Equipment placed in service by Dec. 31, can be expensed (immediately deducted) up to $105,000, rather than depreciating the cost over a number of years. The expensing deduction applies even if you finance some or all of the cost.
Caution: The dollar limit on write-offs for car purchases is $2,960 for a car bought in 2005 and used 100 percent for business. The cost of SUVs weighing more than 6,000 pounds but not more than 14,000 pounds can be expensed up to $25,000.
4. Save for your retirement. You have until the last day of 2005 to set up a qualified retirement plan for this year. Simply sign the paperwork now to adopt a profit-sharing or other qualified plan. You don’t need to contribute even a single dollar at this time; you have until the extended due date of your 2005 return (i.e., Oct. 16, 2006) to fund the plan.
5. Decide how to distribute corporate earnings. If you have a profitable corporation, you can benefit shareholders, employees and others while saving taxes.
6. Declare dividends. While the corporation cannot deduct these payments, shareholders pay no more than 15 percent on dividends. Furthermore, dividends are not subject to the payroll taxes that would apply if payments were in the form of compensation to hareholder-employees.
7. Pay bonuses. Bonuses to rank-and-file employees declared in 2005 by accrual-basis businesses are deductible this year as long as they are actually paid by March 15, 2006.
8. Give to charity. In this post-Hurricane Katrina climate, consider stepping up business gifts to charitable organizations. New breaks apply to certain gifts given to storm victims before the end of 2005. Tip: When gifting late in the year, bear in mind that gifts of checks mailed to charity by Dec. 31 are valid this year, even though received next year. Gifts charged by credit card by Dec. 31 are valid this year, even though you pay off the charge account statement next year.
