Pre-Pay Your Bills and Defer Income
Cash-basis taxpayers may want to prepay as many bills as possible by December 31, 2004. Do not wait until January 2, 2005, to pay your bills or you won't be able to claim those expenses until 2005. You also have the option of deferring income. Consider notifying your clients in December that, as a holiday benefit, you are extending their credit terms from 30 days to 60 days. This is a way to show appreciation for your customers and reduce deposits in December.
Make Charitable Donations
Making donations by the end of this calendar year is very smart tax planning. Donate items such as unused office equipment or cars to charitable entities by December 31 and claim them as donations for 2004. The current law allows donors to deduct fair market value for most items including cars. Beginning with tax year 2005, if a car is donated to a charity and sold, the donor will only be allowed to deduct the gross proceeds from the sale of the car, as well as, provide significant documentation about the transaction.
Now is a very good time to review inventory and get rid of merchandise or equipment that is obsolete, not selling, or damaged. Instead of letting it sit around, hoping it will sell eventually and letting it cost you money to keep it, get rid of it now. Keep track of what you do with bad inventory, because it may be deductible as a business loss or a charitable donation. Consult with an accountant about what you intend to donate as some donations may require paying a "use tax" on donated merchandise, particularly if you bought it using a resale certificate.
Establish a Pension Plan
The government is making it attractive to contribute to or set up a new pension plan for your company. Small employers (100 employees or less) can receive a tax credit for establishing a pension plan for the company for up to 50% of the cost of setting up the plan. The credit is limited to $500 in any tax year, but can be claimed for qualified costs incurred in the year the plan is established as well as plan startup costs incurred in each of the following two years.
Deduct Self-Employment Expenses
If you are self-employed, here are some additional tips:
- You can deduct 100% of amounts paid for health insurance for yourself, your spouse and your dependents as a business expense, while requirements apply.
- You also can deduct half of your self-employment tax. In 2004, the 12.4% OASDI (Social Security) part of the tax applies to self-employment earnings of up to $87,900. The 2.9% Medicare tax applies to all your self-employment income.
Business tax laws can be challenging. Be sure to speak with a CPA or other financial professional about which tax strategies will best benefit your company. As a rule of thumb, you should always be cognizant of your finances and the tax credits available to you. Take the time you have now to plan for later. For more information on tax laws that may impact your company, visit www.irs.gov/smallbiz .
Sidebar: Section 179 Deduction Best Practices
If you know that you are going to need $102,000 worth of equipment reasonably soon, but you have only purchased $20,000 so far, buy the rest of it before the end of the year so you can take the full expense deduction in the 2004 tax year. Or, you might want to delay some purchases if you are already at $102,000 and save them for 2005, so you can get the full deduction next year. You cannot deduct so much that it puts your company into an overall loss for the year, but you can try to zero out your profits or reduce them, and thus reduce your tax liability. You can receive the expense deduction on purchases you make up to December 31, 2004. Even if you charge the equipment on a credit card or buy it with the proceeds of a loan, as long as you are on a cash-basis accounting system, it's still deductible. And you can also deduct credit-card interest you are paying related to business purchases.
