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.
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.