With all the other things going on in the world and in your business, it may seem downright cruel of me to even bring up the subject of taxes, but a few careful steps taken before December 31 can save you money come April 15, 2002.
This year, I want to remind you of the very first rule of all business tax planning -- make your decisions based on what is good for the long-term health of your company, not just on what reduces your taxes.
It' s important to keep this essential rule in mind now because recent tax law changes make it particularly enticing to observe some typical year-end strategies that may not make the best business sense.
Some year-end strategies and the 2001 considerations:
- " Increase expenses, delay income." Ordinarily, this is a critical approach to follow. Here' s why: Taxes on money you earn on or before December 31, 2001, are due by April 15, 2002. But if you can somehow arrange to have that money earned January 1 or later, you don' t have to pay taxes until April 15, 2003. Obviously, it' s better to have that tax money in your pocket rather than Uncle Sam' s.
There' s an added benefit to delaying income until 2002. Recent tax legislation lowered tax rates 1% a year over the next five years. So deferred income will be taxed at a lower rate than income in 2001.
Nevertheless, be careful about deferring income, especially if your customers seem financially unstable. With current economic conditions, there' s greater risk your clients may not pay or pay far more slowly than usual. In fact, you may want to give customers incentives to pay quickly. After all, it' s far better to pay taxes on income -- even at a higher rate -- than to lose the income altogether.
Likewise, I' m cautioning you to be particularly conservative about "increasing expenses," even if there's a tax advantage. Guard your cash and credit carefully. If you are in a position to accelerate expenses, here are some you can pay now:
- Pay January mortgage or office rent.
- Prepay state and local taxes.
- Prepay conference registrations and subscriptions.
- Make initial payments on planned and necessary 2002 expenses, such as printing.
- Hire useful necessary advisors: financial, legal, accounting. Their fees are all deductible, and their advice may help you succeed and survive.
- Business equipment and computers. Every business owner should become familiar with Section 179 of the Tax Code. Normally, most business equipment (such as computers) has to be capitalized -- or deducted -- over a number of years, but Section 179 allows you to "expense" or deduct the total cost of some equipment in the year you buy it. In 2002, that amount is $24,000 (up from $20,000 in 2000).
With such good prices on computers right now, and the very real tax savings from Section 179, it may seem a wise thing to start shopping. But, once again, be careful with your cash. Make sure it' s a piece of equipment you really need.
- Retirement plans. One of the very best tax benefits for the self-employed is the ability to put a fairly sizable percent of income into a retirement plan, much more than those who don' t own their own businesses. This is a great way to shelter income from current taxation as well as prepare for the time you may finally want to kick back.
If you don't already have an IRA, Self-Employment Plan or KEOGH plan, talk to someone soon. Some of these plans have to be set up before the end of 2001, even though you don' t actually have to put any money into them until April 15, 2002. Start preparing for the future.
- Estate taxes. The value of your estate that is excluded from inheritance taxes was recently increased from $675,000 to $1 million, and the tax level lowered to 50%. The exclusion increases to $3.5 million by 2009 with a tax rate of 45%, and then the estate tax is repealed entirely in 2010! So, if you' ve got a sizable estate, it's best to stay alive until 2010 -- if only for tax reasons.
© Copyright Rhonda Abrams, 2001
Rhonda Abrams writes the nation' s most widely-read small business column and is the author of The Successful Business Plan: Secrets and Strategies and The Successful Business Organizer. Register to receive additional free tips from Rhonda at www.RhondaOnline.com.