Top 6 year-end tax tips for 2007
Tax planning ideally is a year-round project for small businesses. But you still can take advantage of money-saving tax strategies even at year-end.
1. Make those year-end purchases.
Why are Office Depots and Staples so busy the last week in December? Because small business owners are busily engaged in end-of-year tax reduction activities. They're loading up on office supplies and other items before December 31.
Businesses can deduct all of their current expenses, and they are supposed to depreciate their asset purchases-things like computers, software and office furniture. It's possible, though, for most small businesses to write off most of their asset purchases-except for real estate and automobiles, which are subject to different rules-in the year purchased.
You can fully deduct up to $125,000 of assets purchased in 2007. Larger businesses are subject to restrictions on the maximum deduction if their total asset purchases for the year top $500,000. The write offs are taken using Section 179, and the deduction will appear on Form 4562 of your tax return.
2. Self-employed and profitable? It's not too late to consider a one-person 401(k) plan.
If you have no employees, these retirement plans can function as super-charged retirement accounts. You can put aside as much as $45,000 ($50,000 if you are over age 50), with the total contribution depending on your overall salary and business profitability.
It's remarkable how much can be set aside in these plans. An example: If you are over age 50 and self-employed with net profit of $80,000, you could put as much as $40,500 of your earnings into a tax-deferred retirement account.
3. Want that SUV Deduction? Buy it now.
While Congress has been tightening up on some deductions, the tax code still allows the so-called SUV deduction-an up-front write off of up to $25,000 on the purchase price of a qualifying sports utility vehicle.
Your SUV can qualify for the deduction if it has loaded gross vehicle weight of more than 6,000 pounds and less than 14,000 pounds and is not designed to have more than nine people behind the driver's seat. Vehicles with cargo areas that are not accessible from the passenger compartment and that are six feet or longer are also excluded.
Note: As of November 2007, the SUV deduction was scheduled to expire on December 31, 2007. While it is possible that Congress could extend the tax break into 2008, many observers think that this deduction may be done away with. Check with your tax pro for the most current information.
4. Write down your inventory.
Do you have inventory on your books (and on your shelves) that you know has reached the point of being basically unsellable? I'm talking about your business's equivalent of pet rocks-a good idea at one point, but something nobody wants now. Get rid of it. Donate or destroy the inventory; the reduction of inventory will also result in an increase in your overall cost of goods sold and reduce your profit.
Start working on those Form 1099s. This is more penalty avoidance than tax reduction. Small businesses are supposed to send a Form 1099 to any individuals, partnerships and LLCs that were paid $600 or more for services in 2007. You don't have to send the forms to corporations. The penalty for failure to file a Form 1099: $50 per form.
5. Say goodbye to bad debts
If your business is on the accrual method of accounting, you declare income when you complete or bill out for the work or service you are providing. That means you may be paying tax on money before you actually receive it.
If your bill never gets paid, you then have a bad debt, and should take that as a deduction. Businesses will often file a small claim against a dead-beat debtor and receive a judgment but then not be able to collect, either because the debtor is unable to pay, bankrupt or out of business. In order to take the bad-debt write-off, you should keep records showing the efforts you made to collect payment and that the debt is now worthless with no prospect of your getting paid.
6. Prepay estimated taxes for current tax benefits.
State and local income taxes are deductible in the year paid. If you have to make estimated tax payments-or simply know that you are going to owe money when finishing your personal or business returns-it can make sense to make an estimated tax payment at the end of December instead of at the beginning of January. Reason: if deductible, the tax payment will reduce your federal taxable income this year instead of next.
This principal applies for local property taxes as well. If your business is subject to local licensing or business tax assessments as well, making a payment in December instead of January will produce the benefit of pulling a "next-year" business deduction into this year.