BEST DEDUCTIONContribute
Green cars, education expenses, entertainment expenditures, software purchases, charitable donations … there are some good deductions out there, but the best is still a retirement account, in part because you don’t have to buy a thing to be entitled to it. This year, you can fund a defined contribution plan with up to $49,000 (with an additional $5,500 if you’re over 50 and qualify for a catch-up contribution). Sole proprietors are limited to the lesser of $49,000 or 20 percent, of self-employment income. The plan has to be in place by Oct. 1.
Got Hummer?Buy Stuff
The “Hummer Loophole,” which allows businesses to deduct the full amount of certain equipment purchases during the tax year they were bought, is still in effect, but only for two more years at its current high cap of $250,000 (meaning you can spread out up to $500,000 in purchases over the two years). It will return to $25,000 in 2011. So, bottom line is that if you need to buy equipment, and that can be anything from Hummers to office equipment to breeding goats, used or new, you should start planning to do it soon.
Pain SharingGive
Here’s another “2009” special. If your stock portfolio took a bit of a beating in the last year, consider giving some of that stock to your children. In 2009, you are allowed to gift as much as $13,000. The gift helps reduce the size of your estate — cutting the share of inheritance tax that will be paid — and there’s a good chance your kids will enjoy some gains from your purchases of Citi shares last year.
Tax CelebrationHold a Tax Layaway Sale
As tax refund checks start going out, encourage your customers to “Celebrate with a Tax Break!” Offer them the opportunity of putting away something on layaway that can be paid for when their tax refund check is sent to them.
No Gain? No WorryOffset
You probably already know that losses aren’t a bad thing when it comes to tax, because you can use them to offset gains elsewhere. A common instance is using investment losses in taxable accounts to offset capital gains. But what about when there are no capital gains, as well may be the case this year? That’s actually better because you can also use the losses to offset up to $3,000 in income. A $2,000 loss that offsets $2,000 in capital gains will save you $300 at the 15 percent capital gains rate. But that same $2,000 can save you $700 if you’re in the 35 percent tax bracket and offset $2,000 in income. “And any loss above the $3,000 can also be carried to future years to offset future gains,” says Rhonda Esakov, an enrolled agent at Treasury Enrollment in Texas.
Memo from GeithnerGet Help From a Pro
Seek out a licensed tax professional such as an enrolled agent (search www.NAEA.org ), a tax lawyer with a board certified specialty or a Certified Public Accountant (search your state name for CPAs, such as www.tscpa.org for Texas). “Inexpensive tax software is only useful if you know all the laws, current changes and deductions you are fully entitled to use,” Esakov says.
Healthy PolicyStay Prudent
When looking for places to cut costs it can be tempting to take a gamble on your health. The tax law urges you not to. Uncle Sam provides generous incentives for small-business owners to deduct the cost of their health insurance. Self-employed individuals can generally deduct 100 percent of the cost of their health insurance up to the amount of their earned income. “In addition, if they set up a Section 105 Health Reimbursement Arrangement, they can deduct up to 100 percent of their medical bills as well as the cost of health insurance'” Esakov says.
Deadbeats, DogsWrite It Off
Looking past this year’s tax deadline, if you get near to the end of 2009 and find you’ve got inventory that’s collecting serious dust or clients who absolutely won’t pay, consider throwing in the towel. Write off the dated inventory and, if you’re using the accrual method of accounting, keep good records of your attempts to collect from deadbeats, and then write off that debt too, and move on.
ANOTHER DECEMBER TIP
Whip out your checkbook and pay any business related bills, even if they are due in January but cover expenses incurred in the previous year. All of these expenses can help reduce your tax burden come next April. If you’re hanging on to old poorly functioning equipment, it might make financial sense to replace it before the end of the year and get some of the investment back early, rather than later. If you are on an accrual basis and still closing your books for the prior year you can list these unpaid bills as accounts payable to ensure you get the write-off for that year, then pay the bills in the current year.