Forget holiday shopping. Now's the time to huddle with your CPA and make year-end tax moves that will shave Uncle Sam's bill. Here are a few questions to ask your number cruncher.
What are my projected taxes this year and for the next two? Without these estimates, it's impossible to know whether you should defer or take income, accelerate or cut spending before the ball drops in Times Square.
What tax strategies are your other clients trying? Their tax moves might be smart to follow. Your CPA might have a client that switched to a high-deductible health plan and cut its taxable income by contributing to employees' health savings accounts. There may be industry-specific strategies, too.
Can I deduct excess inventory that's lying around? You can't take a write-down if you're trying to sell the goods at full price, says Edward Mendlowitz, a CPA at WithumSmith+Brown in New Brunswick, New Jersey. Your accountant will want proof that you've offered it at a discount, like an e-mail promotion sent to your favorite customers. Even if the inventory doesn't move, you can claim it as a write-down.
Do I have to depreciate the computers I bought this year? Not necessarily. Under tax code section 179, you can immediately deduct up to $108,000 worth of new business equipment and property as long as it's placed in service by the end of this year. It doesn't matter whether you pay cash or put it on your credit card. There are certain restrictions; your accountant will know which apply to you.
Should I put my kids on the books? They have to actually work, such as emptying the garbage cans or modeling for your product catalog, but they can earn up to $3,300 without paying income tax. You'll have to cover payroll taxes of about 20 percent, notes Mendlowitz, but you'll still come out ahead if your business falls into, say, the 35 percent tax bracket.
Can my business take the manufacturer's deduction? A 2005 change to the tax code lets companies deduct a percentage of profits on products they've made in the U.S. The deduction is 3 percent in 2006, and jumps to 6 percent next year. The IRS defines a manufacturer fairly broadly to include products like software and construction. Find out if you qualify.
Should I buy a hybrid for my company car? It's good for the environment--and your wallet, given current gas prices--but the IRS isn't doling out tax credits for hybrids uniformly. The amount depends on the make, model, and year of the vehicle, as well as how many hybrids the car maker has already sold in 2006. Your CPA should have current guidelines.
Can you look over my QuickBooks? "QuickBooks and programs like it cause a lot more work for us when we're preparing a return," gripes Art Auerbach, a CPA at Goodman & Co. in McLean, Virginia. The reason: Many people don't do a good job tracking income and expenses, creating a mess for accountants at the height of tax season when their time is worth a premium. Make sure your accountant has plenty of time to review your books and fix any mistakes.