Now's the time to review your tax picture for the current year. This will allow you to take actions that can reduce your 2000 taxes. These actions can also have a favorable impact on taxes for years to come. Here are some ideas to consider:
- Plan equipment purchases. Take advantage of a first-year expense write-off (up to $20,000 in 2000) for equipment placed in service by the end of the year. To take this write-off, you need to show taxable income for the year.
- Get retirement plans in place. Self-employed individuals and small-business owners (on a calendar year basis) who want to use SIMPLE plans for 2000 must set them up by October 1 to claim deductions on 2000 returns. Self-employed individuals and other small businesses can set qualified plans, such as profit-sharing or money purchase plans, before the end of the year and don't have to make contributions for 2000 until the due date of their return, including extensions (e.g., August 15, 2001, if there's a four-month filing extension in place). They can also use simplified employee pension (SEP) plans for retirement savings. Now's the time to assess which retirement plan is best for your business.
- Prepare for tax elections. For example, corporations that want to use S status for 2001 can file now or as late as March 15, 2001, for an election to be effective on January 1, 2001.
- Review employee benefit plans. Medical insurance costs are rising, and you may want to explore alternative insurance arrangements for the coming year. But medical savings accounts (MSAs) cannot be used in 2001 to reduce your medical costs by opting for high-deductible plans (unless Congress extends the law). If the business is doing well, consider adding fringe benefits that your business can offer to employees. Flexible spending accounts and deferred compensation arrangements for 2001 must be in place by the end of 2000.
- Review estimated tax payments to avoid underpayment penalties for 2000 (or overpayment amounting to a tax-free loan to the government). Adjust the final two estimated tax payments for this year accordingly.
Note: These answers are intended to provide helpful and informative material on the questions posed. They are not intended to be taken as legal, accounting, investment, or other professional advice. If you require personal assistance or advice, consult with a professional.
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