December 12, 2010

December 2010 Tax Tip

5 Year-End Tax-Planning Moves for Business Owners

Year end is usually hectic for most business owners because you are usually wrapping up business matters while also planning ahead for the new year. This December is especially challenging considering Congress is still debating the Bush Tax Cuts and other tax issues.

In such uncertainty, we prefer to focus on what is known rather than on what is not known about current tax rules, and to take year-end actions that are helpful regardless of possible changes to tax rules.

Check out these five year-end tips we recommend for business owners:

Consider a Retirement Plan
Entrepreneurs are by nature, optimists, but one day one must consider retirement and the present is the best time to plan. Profits can be sheltered in qualified retirement plans, and the 2010 rules remain relatively unchanged from 2009. For example, a corporate owner or self-employed person whose salary or net earnings are sufficient can contribute a maximum of $49,000 to a SEP (Simplified Employee Pension) plan, getting a tax deduction while saving for retirement.

Owners who don’t yet have qualified retirement plans for their companies should complete the paperwork (provided by their financial institution or mutual fund) by December 31. Then you’ll have until the extended due date of your 2010 return to make contributions for the year.

It’s wise to discuss the wide range of plan options with your CPA or financial planner. Keep in mind, if you do miss the December 31 deadline for setting up a qualified retirement plan, you still have one plan option – the SEP – which can be set and funded as late as the extended due date of the return.

Don’t Forget Health Coverage
Business Owners (other than C Corporations) who pay for their health coverage can deduct it, but only as a personal expense rather than as a business expense. However, for 2010, if you are self-employed you can use the premiums to offset the amount of net earnings used to calculate self-employment taxes (which cover mandatory Social Security and Medicare contributions). Because of the tax savings, you may want to reduce your estimated taxes (the last payment for 2010 is due on Jan. 18, 2011).

If you use the cash-basis, you may want to pre-pay your 2011 premiums to boost write-offs for 2010 while saving on self-employment taxes. If the insurance qualifies as a high-deductible health plan, then you’re allowed a tax-deductible contribution to a Health Savings Account, or HSA, for 2010. (To be considered “high deductible” in 2010, the policy’s deductible must be at least $1,200 for individuals and $2,400 for families and meet certain other tests). While the HSA 2010 contribution can be made as late as April 18, 2011, the sooner it is made, the more earnings you can build up on a tax-advantageous basis. Earnings will never be taxed if withdrawn to pay qualified medical costs.

Donate to Charity
Business owners who have had a good year can share their good fortune with charities. The donations are tax-deductible within the limits allowed by law. For example, if you own a C corp, your charitable deductions are limited to 10% of taxable income.

For owners who record business income on personal tax returns (such as sole proprietors, S Corporations or LLC’s), note this change for 2010: There’s no phase-out of itemized deductions for high-income taxpayers. That’s a shift from prior years, when you lost part of your charitable deductions when income exceeded a threshold amount. If you’re unsure whether an organization qualifies for tax-deductible contributions, check IRS Publication 78.

Upgrade Equipment
If you’re looking to invest in new business equipment – such as a laptop or iPhone – now’s the time to act. Whether your year was profitable or not, there is a tax break to help:

For profitable businesses, elect first-year expensing for the cost of equipment up to $500,000. (This dollar limit is up from $250,000 in 2009). If the cost is more than the dollar limit, you can also use 50% bonus depreciation and a regular depreciation allowance to effectively write off most of the cost of the purchase. The bonus depreciation option is set to expire on Dec. 31.

For non profitable businesses, rely on 50% bonus depreciation to write off half the cost (plus a regular depreciation allowance on the other half). This write-off can create or increase a net operating loss, which can result in a carryback that can generate a cash refund.

While first-year expensing can be used for new or pre-owned equipment, bonus depreciation is limited to new equipment. However, the purchase of equipment for both first-year expensing and bonus depreciation can be financed in whole or in part without any impact on the tax write-off.

Bring Your Books Up-to-Date
This is a tax tip we could give January through December. Not only does tax planning have to wait until you know if your business made a profit or not, poorly kept books prevent you from using financial reports throughout the year to make strategic decisions and grow your business.

Wendroff & Associates offer several options to help you with this, including QuickBooks Training, QuickBooks Review and Outsourced Bookkeeping. However you move forward, keeping good books is critical to the success of any business, regardless of size.

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