Year-End Tax Strategies
"The hardest thing to understand in the world is the income tax." -- Albert Einstein
Each December, I have the unpleasant duty of interrupting my readers' holiday activities with a reminder that in just a few short months, tax time will roll around. But my motive is pure: I want to save you money -- legitimately -- on your taxes next April.
While it's always important to take year-end tax-saving steps, this year's tax planning is a bit more complicated. You need to assess whether your business was affected by the tax laws passed by Congress this summer and how your business fared during the nation's economic slowdown.
For instance, in most years the golden rule of end-of-year tax planning is "defer income, accelerate expenses." But if you've had a bad year, and you expect next year to be better, you may want to do just the reverse. You might, for instance, want to encourage clients to pre-pay for January products or services (perhaps offer a slight discount as an enticement) and push hard to collect any overdue invoices before December 31.
As to tax law changes, the most important one is the reduction in the personal income tax bracket. Few others, if any, will affect small businesses directly unless you make large capital expenditures of depreciable assets or you're selling your company. Here are the major tax changes to keep in mind:
- The top individual income tax bracket has been lowered from 38.6% to 35%.
- Capital gains (and losses) rates have been reduced to a maximum of 15% (down from 20%) rate for taxpayers in higher income brackets and from 10% to 5% for taxpayers in the lowest two tax brackets. This is effective for capital gains after May 5, 2003.
- The Section 179 "expensing" amount has increased from $25,000 to $100,000. This is the amount of depreciable assets you are allowed to write off in one year rather than depreciate over the life of the asset.
So, what can you do now to lower your business taxes?
- Buy a van or truck: Realistically, the biggest depreciable asset purchased by most small companies is a business vehicle. Prior to this year, "nonpersonal" business trucks or vans had to weigh at least 6,000 pounds to qualify for the Section 179 expensing option (the so-called "SUV tax break"). Now, qualified nonpersonal utility vehicles -- regardless of weight -- placed in service after July 7, 2003 can be completely deducted in 2003 -- as long as your total expensing doesn't exceed $100,000.
Here's how this might work: Let's say you'll have $60,000 in earned income in 2003 after all other expenses. If you're in the 30% tax bracket, you'd pay $18,000 in taxes (before all your other allowable deductions). If you went out and bought a $20,000 truck or van, you'd lower your taxable income to $40,000, and you'd pay $12,000 in taxes (and it might lower your tax rate as well). Thus, the government would have paid for $6,000 of your brand new vehicle.
- Structure the sale of your business carefully: Selling stock qualifies as capital gains (15%) while selling assets is treated as ordinary income (up to 35%). So if you're in the process of selling your business, try to structure the purchase as a sale of stock rather than a sale of assets.
- Set up a Dependent Care Assistance Program: This year I discovered an inexpensive way to put more money in my employees' pockets. By setting up a DCAP -- a simple procedure -- I can reimburse my employees up to $5000 in child care expenses tax free. They don't pay income taxes on the reimbursement, and I don't pay payroll taxes. Ask your accountant now if you should put a plan in place before year end.
- Join a weight loss program: While medical expenses are deductible only if they exceed 7.5% of your estimated gross income, you can include weight loss programs -- if recommended by your doctor.
If you'd like a sense of how you'd fare under different scenarios, play around with the "Tax Relief Estimator" at the TurboTax website (www.turbotax.com -- click on "Tax Calculators"). That way, you can see if you should go truck-shopping this weekend.
Copyright Rhonda Abrams, 2003
Rhonda Abrams is the author of The Successful Business Plan: Secrets & Strategies and the president of The Planning Shop, publishers of books and other tools for business plans. Register for Rhonda's free business planning newsletter at www.PlanningShop.com.