08/ 21/ 2006
by Kay Bell
During the dog days of summer, taxes are probably the last thing on your mind. But if you want to make sure your business doesn't overpay its tax bill next filing season, you need to do some tax planning now.
One of the easiest things to do between now and the end of the tax year is maximize business deductions. You also should take some time to look at your company's structure, think about retirement and clean up your office filing system.
A little attention in each of these areas could cut what your company will ultimately owe Uncle Sam.
Search for Section 179 expenses
This part of the tax code allows a business to take an immediate write-off for equipment outlays, rather than spreading the deduction (via depreciation) over several years. In 2006, you can expense up to $108,000 in 2006. But don't go overboard. If you buy more than $430,000 of property, you'll lose a portion of this deduction. And if the cost of your section 179 property this year is $535,000 or more, you'll lose the tax break altogether. Find out more about section 179 expensing.
Determine whether to depreciate
If you decide you want to depreciate equipment rather than expense it, do some homework. Buying depreciable business property at the end of a tax year can work for or against your business.
On the plus side, you're generally allowed to claim six months' worth of the depreciation in the year you put the property to business use, regardless of how late in the year you purchase it. However, if you buy too much business property at the year's end you could run into tax trouble. If the assets you buy in the last quarter account for more than 40 percent of your company's annual business property purchases, you must use a different depreciation schedule, known as the mid-quarter convention. Basically, this means a year-end purchase will net you just six weeks' worth of depreciation instead of the normal six months.
Tally your travel
If you've been putting off visits to existing or potential clients, taking a few business trips now might pay off. You can add to your business and write off 100 percent of the travel costs. Remember, though, that meals are only 50 percent deductible and, in most cases, you must dine with a client to get even that much of a deduction.
Don't overlook local travel. Although the IRS no longer requires a contemporaneous travel log, keeping a notepad in your car to jot down all your business-related trips will help ensure you don't forget any at tax time. More electronically inclined? Then use the recorder feature on your cell phone or buy a mini-recorder to tape your travel details, making it a tax-deductible purchase, too.
In addition to deductions, here are several steps you can take now to help lower your coming tax bill.
Plan for retirement
If you have a company retirement plan, make payments to it. If you don't have one, set it up now. September 30 is the deadline to establish a Savings Incentive Match Plan for Employees of Small Employers (SIMPLE plan); a Keogh must be opened by Dec. 31. Regardless of what type of retirement play your business has, it's doubly worthwhile. Your contributions will pay off in your golden years and are a great way to reduce today's taxable income.
Reevaluate your business structure
As your business has grown, your original choice of legal entity might no longer be appropriate. Did you begin as a sole proprietor? Perhaps it's time to investigate an LLC arrangement. Or maybe incorporation with its potential tax savings is now the correct entity for your company.
Meet with your tax adviser
If you don't have a tax adviser or accountant, consider hiring one. If you wait until tax season to do so, it'll be too late to implement effective business and tax strategies. Plus, the cost is a tax-deductible business expense, and the personalized planning tips you'll get should help pay for the cost.
Get organized
You don't need a professional to know that better record keeping will help you substantiate your business deductions. It's never too late to get your financial and operational paperwork in order. When you do hire a tax pro or accountant, they'll thank you for it and won't have to charge you for their time to set up a system.
Defer income
Your organization effort also will give you a better idea of where you stand as the end of the year approaches. If it's been a good one, that's great. But it's also great for the IRS. So if you can afford it, consider postponing collection of some of your receipts until next year to push that income into a new tax year. And your customers also might appreciate your thoughtfulness in sparing them a pre-holiday bill.
