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 pensions (SEPs), Savings Incentive Match Plans for Employees (SIMPLEs), or other qualified retirement plans. The limits on elective deferrals by participants in 401(k) plans and SIMPLEs increase for 2003.
Bonus: If you don't yet have a retirement plan for your business, you may claim a tax credit for starting one. The credit for administrative costs and employee education, which applies only to small business (those with no more than 100 employees), is up to $500 in each of the first three years of theplan. You can also only claim the credit if the plan covers at least one employee who is not considered a highly-compensated employee. For more information about retirement plan options for small business see IRS Publication 560 at http://www.irs.gov.
Consider flexible spending arrangements to let employees pay for health and/or dependent care on a pre-tax basis, and, at the same time, save employment taxes on employees' salary reduction contributions to the arrangements.
Budget for the acquisition of equipment and supplies. The cost of equipment purchased in 2003 can be expensed up to $25,000 (up from $24,000 in 2002) instead of depreciating itover several years. This is true even if you finance the purchase. In addition, you can claim 30% bonus depreciation--another first-year write-off--for excess purchases.
Sloppy record keeping may have cost you deductions you might otherwise have been entitled to. Act now to put your books and records in order. For example, make sure that mileage records are kept for a personal car usedpartly for business.
Also make sure that your estimated tax payments are sufficient to avoid penalties.
Self-employed individuals can now deduct 100% of health insurance premiums as an adjustment to gross income (up from 70% in 2002).
But a number of provisions expired at the end of 2002, including the work opportunity credit, the welfare-to-work credit, expensing of environmental remediation costs, and the enhanced deduction for donations by C corporations of computers to schools and libraries. These write-offs can no longer be claimed unless Congress extends them or makes them permanent. Keep watch for legislative developments.
If you've been in operation for a while, it may be time to change your business structure. This is especially true in light of decreasing individual income tax rates over the next several years. 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 or form a limited liability company to obtain personal liability protection. If you're already a C corporation and want to elect S corporation status for 2003-- you have until March 15, 2003 to act. Consult your tax professional to determine the most appropriate structure for your business.