Summertime Tax Breaks
Taxes may be the last thing on your mind this summer, but the warmest season of the year provides lots of opportunities to whittle away at your company's tax bill and plan ahead for the next IRS deadline. During the summer, clients tend to be more relaxed and ready to schmooze at tax-deductible dinners and events. Meanwhile, it's your accountant's slow season, making it the ideal time to revisit your tax plan and develop smart new money-saving strategies. But while most companies host an annual picnic or barbecue each summer--an obvious write-off--many fail to take advantage of the lesser known chances to cut their tax bills between Memorial Day and Labor Day. "There are more tax breaks available than business owners realize," says Alan Badey, an accountant at Citrin Cooperman & Co., a New York City consulting firm that caters to entrepreneurs. We've rounded up six strategies for you to consider in the coming weeks. Some are underused, some are unexpected, and others are creative twists on old standbys.
- Hire Junior "Employing your child is one of the most tax-efficient things you can do," says Bernie Kent, a financial adviser at PricewaterhouseCoopers in Detroit. When you hire a son or daughter, your business can take a deduction for compensation paid to that employee, which reduces the amount of taxable income flowing through your company. Your child, in turn, can take a standard deduction of $5,150 on his or her personal income taxes. To qualify, that child must perform a real job and receive a reasonable salary. If your company is unincorporated and you are the sole owner, your child is also exempt from paying FICA taxes until age 18; unemployment taxes don't kick in until age 21.
- Take your clients to the beach There's no better place to woo clients than over poolside cocktails, according to Richard Estevez, CEO of Washington, D.C.-based Trusted Translations. Estevez had always entertained clients on a small scale, at dinners and the like, assuming that more lavish affairs would be unaffordable. When he broke down the tax savings, though, an ambitious event seemed doable. Last summer, he invited 15 clients, along with their spouses and children, on a weekend trip to Uruguay's lush Punta del Este beach resort. Estevez hired speakers, organized a golf outing, and hosted a cocktail party with a Latin jazz band. His clients paid for their own airfare and accommodations, some of which they were able to write off. Trusted Translations deducted 100 percent of the cost of the speakers and airfare for Estevez and his staffers and wrote off about half of the bill for the golf outing and cocktail party. (Keep in mind that foreign conventions can be written off only if they fit certain IRS criteria. Estevez qualified due to the nature of his business and the fact that many of his clients are based in Latin America.) All told, Trusted Translations plunked down roughly $40,000, about $28,000 of which qualified for deductions. Estevez estimates that the trip boosted 2005 sales by at least 10 percent. "The goal was to create a relationship with our clients, so they feel like they know us on a personal level," he says.
- Mix business travel with pleasure Tacking vacation days onto business trips is one of the oldest tricks in the book, but many business owners fail to take advantage of the potential tax savings because they don't plan ahead, says John Maddox, a principal at tax firm Maddox Ungar in Bingham Farms, Michigan. When Alan Rabinowitz founded the Internet marketing firm SEO Image in New York City in 2003, he decided to take his wife, Susan, on at least one business trip each summer. Since then, they've turned work-related jaunts to Washington, D.C., Boston, and Philadelphia into mini-vacations. Rabinowitz deducts 100 percent of his airfare and any hotel costs incurred on workdays. He is careful not to break the law by writing off sightseeing costs, meals, and his wife's plane fare. "I don't want to raise a red flag," he says.
- Throw a party Company picnics, barbecues, and pool parties offer the best of both worlds: They boost employee morale and lower the company tax bill. Half of all costs related to food, facility rental, decorations, and entertainment are tax-deductible, and you don't have to talk shop for the party to be legitimate in the eyes of the IRS. That said, it's always a good idea to keep a record of attendees on file in case of an audit, especially if you host company shindigs in your home.
- Go green Dreading this summer's utility bills? Give your company an energy-efficient makeover to lower your air conditioning costs--and your 2006 tax bill. Under the Energy Tax Incentives Act of 2005, which went into effect in January and lasts through 2007, companies are eligible for tax credits equal to 30 percent of the cost of buying and installing solar panels. Building a new office? Cut energy consumption in half by using energy-efficient lights, windows, and heating and cooling systems to qualify for a deduction of as much as $1.80 per square foot. Companies that buy or lease hybrid cars or trucks qualify for tax credits of up to $3,400.
- Grill your accountant Summer is a slow period for tax professionals, so it's the perfect time to have your accountant examine your total tax situation, says Frederick Daily, author of Tax Savvy for Small Business. Meet with your accountant, review your company's strategy, and discuss new ways to cut your bill. As you do so, keep in mind that IRS rules governing business deductions tend to be vague, especially when it comes to writing off hotel stays, meals, and entertainment. Those gray areas make it difficult to judge what will draw the agency's ire, warns Kent at PricewaterhouseCoopers. "The IRS uses a very closely guarded formula to detect returns for audit," Kent says. To make matters worse, audits of smaller companies are at their highest rates in five years. In fiscal 2005, which ended on September 30, the number of IRS audits of corporations with revenue of less than $10 million soared 145 percent, to 17,867. Play it safe by keeping meticulous records and writing off only parties and trips that were primarily intended for business, Kent advises. "If you have to go somewhere on business, even for a day, and you tack on an extra few days of vacation it should be okay," he says. "If you tack on two weeks to a one-day meeting, you might have a problem."
Visit www.inc.com/handson for more information on tax incentives for energy-efficient business.