Year-End Tax Strategies
"Death and taxes are both certain, but death isn't an annual occurrence."
Excuse me for interrupting your holiday season with a less-than-festive reminder: pretty soon it's going to be tax time. I only mention taxes now because I'd like to help you lower your tax bill -- legally. A few simple steps, taken before the end of the year, will save you money on April 15.
Before I do, however, I'd like to share my philosophy of business tax planning: make decisions based on the long-term health of your company not just on short-term tax benefits. Don't do anything that undermines your company's overall well-being just to reduce your tax bill.
That being said, here are some steps to take now:
- Increase expenses, delay income: This is the Golden Rule of Year-End Tax Planning. Why? Because taxes on money you receive on or before December 31,2002 must be paid by April 15,2003. But taxes on money you receive January 1,2003 or later aren't due until April 15,2004! In other words, by delaying income even a few weeks, you can hold on to that tax money for another year.
Of course, there are exceptions. If you've had little or no income this year but expect higher income in 2003, keep as much income as possible in this year's tax returns. You'll probably be in a lower tax bracket or, if it's been a REALLY bad year, your expenses may offset your income altogether.
Also, if you need money now or are worried about the financial stability of some of your customers, get that money in the bank as soon as possible! It's better to have money in the bank than to risk the possibility of never seeing the money at all.
Likewise, don't "increase expenses" if you can't afford them. Having cash is always better than a tax deduction.
- If you are in a position to accelerate expenses, here are some you can pay now:
-- Prepay January mortgage or office rent;
--Prepay state and local taxes;
--Prepay conference registrations and subscriptions;
--Make initial payments on planned and necessary 2003 expenses, such as printing.
Hire necessary advisors, such as financial planners, attorneys, accountants. Their fees are all deductible.
- Buy necessary business equipment and computers: One of the most business-friendly aspects of the Tax Code is Section 179. This allows you to deduct or "expense" - rather than depreciate - a certain amount of capital equipment. In other words, you can take the entire amount as a deduction this year rather than only a percentage of the expense. In 2002, the "expensing" amount is $24,000. This means that Uncle Sam immediately helps offset the cost of vital new equipment. So go shopping!
- Join Weight Watchers: Unreimbursed medical and dental expenses can only be deducted if they exceed 7.5% of your adjusted gross income. But a court ruling this year determined that costs of weight loss programs could be included in medical expenses, as long as a doctor prescribed them. So if you're close to the requisite 7.5% in medical expenses and your doctor says to lose a few pounds, now might be the time to join a gym.
- Save for Retirement: Self-employed individuals get a real break, as they are allowed to put a higher percent of income into a retirement plan than others. If you've had a good year, this is a great way to shelter income and lower taxes. Talk to someone about an IRA, Self-Employment Plan or KEOGH Plan now! Generally, you must establish these plans by the end of the calendar year, but you don't have to put money into them until April 15. This year, the maximum amount you're allowed to contribute to a qualified plan has increased substantially -- to 100% of your income (instead of 40%) or $40,000 (whichever is less).
By the way, if you'd like a ballpark sense of the tax liability you might be facing, Intuit -- the maker of Quicken, QuickBooks, and TurboTax - has put a quick tax estimator on its Web site, www.turbotax.com But are you really sure you want to face taxes and holiday shopping at the same time?
Copyright Rhonda Abrams, 2002
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.