It's already time to start thinking about taxes for 2001. If you plan carefully and take these steps, you can minimize your tax bill for the coming year.
Review your compensation arrangements. Compensation paid to yourself and your workers may account for a sizable portion of your business budget. Take some steps to minimize taxes on this compensation.
If you're considering offering deferred compensation options for cash bonuses to be paid this year, the agreement must be in place before the compensation is earned for deferral to be effective.
If you reimburse employees for travel and entertainment expenses, do so using an "accountable plan." This arrangement requires employees to account to you for expenses and return any excess reimbursement within a reasonable time. By having an accountable plan, reimbursements are not treated as employee wages (they aren't reported on W-2s) and are not subject to employment taxes (a savings for both you and your employees).
Review employee benefit plans. Consider plans that will boost employee morale, foster loyalty, and save you taxes.
Explore your retirement plan options -- for example, simplified employee pension (SEP), Savings Incentive Match Plan for Employees (SIMPLE), or other qualified retirement plans. The earlier in the year you act, the more options are open to you.
Consider flexible spending arrangements to let employees pay for health and/or dependent care on a pretax basis.
Plan out purchases for the year. Budget for the acquisition of equipment and supplies. The cost of equipment purchased in 2001 can be expensed up to $24,000 instead of depreciating it over several years. This is so even if you finance the purchase.
Assess your hiring practices. When taking on additional help, consider hiring certain economically disadvantaged workers so that you can claim a special tax credit. For example, hiring a long-term family assistance recipient can entitle you to a credit of up to $8,500 over two years. Check with your state employment agency about certification requirements, and see IRS Pub 334, Tax Guide for Small Business for more information on this type of tax credit.
Avoid mistakes you might have made in the past. Sloppy record keeping may have cost you deductions you might otherwise have been entitled to. Act now to bring your books and records in order. For example, make sure that mileage records are kept for a personal car used partly for business. In addition, underpaying estimated taxes may have resulted in penalties for you in previous years. Make sure your estimated tax payments for 2001 are sufficient to avoid penalties.
If you're self-employed (or an owner of an S corporation liable for taxes on his or her share of corporate income), estimated tax payments must total at least 90% of the 2001 tax due or 100% of 2000 tax liability (110% of 2000 tax liability if your adjusted gross income in 2000 was more than $150,000, or $75,000 if married and filing separately).
C corporations must pay 25% of "required annual payments" in four installments. Required annual payments generally are 100% of the current year's tax (first installment of 2001) or 100% of the prior year's tax (assuming the prior year was a 12-month period and there was tax shown on the return). Certain annualized methods can be used to figure required estimated tax payments. Caution: "Large corporations" (those with taxable income of $1 million or more in the current year and any of the three preceding years) can use the prior-year safe harbor only for the first installment and must make up any shortfall in the next installment.
Reassess your form of business. If you've been in operation for a while, it may be time to change your business structure. For example, if you're now an S corporation and have grown quite profitable, you may consider terminating the election to take advantage of fringe benefit programs limited to C corporations (for example, group-term life insurance). If you're self-employed, you may want to incorporate to obtain personal liability protection. If you want to elect S corporation status for 2001 you have until March 15, 2001. Consult your tax professional to determine the most appropriate structure for your business.
BARBARA WELTMAN is an attorney and a trusted professional advocate for small businesses and entrepreneurs. She is the author with such titles as J.K. Lasser’s Small Business Taxes and Smooth Failing, and she contributes regularly to American Express OPEN and SBA.gov. Her articles have appeared in the Wall Street Journal and U.S. News and World Report. Weltman is also the publisher of Idea of the Day and monthly e-newsletter Big Ideas for Small Business at www.barbaraweltman.com and hosts radio shows and podcasts, including Build Your Business radio. She has been named one of the 100 Small Business Influencers in the U.S. for the third year in a row. @barbaraweltman