Just finished your 2005 tax return? Well, you'd better start thinking about 2006. The sooner you focus on this year's taxes, the more time you'll have to plan effectively. Unfortunately, tax planning is complicated by tax uncertainty--expired or expiring tax breaks have yet to be extended as of this writing and suggested new tax breaks are pending. Regardless, here are some key tax write-offs you can count on for 2006:
- Expensing equipment purchases. If you buy office furniture, a computer or other equipment for your business, you may be able to deduct the cost up to $108,000 (up from a $105,000 limit in 2005), rather than having to claim depreciation over five or seven years in most cases. This deduction applies to both new and used equipment, whether you pay cash or finance some or all of the bill.
Key requirement: You need to be profitable to benefit from the deduction, something you can determine when you file your taxes next year. Note: When annual equipment purchases top $430,000 in 2006, the expensing limit is reduced dollar for dollar; no deduction can be claimed when purchases reach $538,000.
- Saving for retirement. Sock away money with the help of Uncle Sam by using qualified retirement plans, such as 401(k) plans, SEPs, SIMPLEs, and profit-sharing plans. New for 2006: The limits on tax-deductible contributions have increased for qualified retirement plans. Also new for 2006, 401(k) plans can be modified to accept after-tax contributions to Roth 401(k)s as a way to build tax-free retirement income. Note: If you want benefits for yourself, you may have to provide them for your staff. Assess the cost of coverage, weighing it against the intangible you receive from engendering employee loyalty for providing this benefit.
- Making energy improvements. The high cost of gasoline and other energy prices should be a wake-up call to employ conservation measures. Again, federal (and in some cases state) tax breaks encourage conservation. Under federal law, you may qualify for a tax credit by buying a hybrid vehicle or for a deduction by bringing your building up to certain energy standards. These new energy breaks in most cases apply only for 2006 and 2007, so learn what they are and whether you can take advantage of them.
- Explore health insurance options. Like energy costs, health coverage continues to rise. Determine whether health savings accounts (HSAs) make sense for your business. These savings accounts combine with a high-deductible health plan to lower premiums while affording a savings opportunity. Contributions to HSAs are tax deductible within limits and earnings are not taxed when withdrawals are made for medical expenses.
Most important: Make sure your recordkeeping practices are in order. One of the major reasons why businesses fail to claim all the tax breaks they're entitled to is because of careless record-keeping and missing receipts.
As with all financial matters, work with your CPA to ensure your business's compliance with new tax laws and your qualifications for tax breaks.