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Column by Barbara Weltman
Last Minute Tax-Savings for 2006
It may be December, but it's still not too late to reduce your year-end tax bills.
If 2006 was a good year, why not boost your tax deductions and lower your tax bill by ordering supplies, extending subscriptions, and paying all outstanding bills before the end of the year? You can, thanks to deductions for prepaid expenses, though the savings may be limited. For instance, no deduction can be claimed for benefits extending beyond either 12 months from payment or the end of the year following the year in which payment is made, whichever is earlier. For example, paying for a three-year subscription to a business journal in December only creates a deduction for 12 months; the portion of the subscription cost for the other 24 months is claimed in future years.
Here are a few other last-minute tax-savings you might want to consider.
Save for retirement
If you set up a profit-sharing or 401(k) plan by Dec. 31 by signing the paperwork with a brokerage firm or other financial institution, you can make tax-deductible contributions for 2006. You then have until the extended due date for the 2006 return (Sept. 15, 2007, for corporations; Oct. 15, 2007, for sole proprietors) to fund the plan. If you fail to set up a plan in 2006, you can still create and fund a Simplified Employee Pension (SEP) plan by the extended due date of the 2006 return. However, the drawback of a SEP is that, unlike other qualified retirement plans, it does not allow you to borrow from it.
Distribute earnings
If you own a corporation and this has been a good year for business, pay out earnings. This can include year-end bonuses to staff, which are tax deductible. It can also include dividends to shareholders, which, though not deductible, are taxed to shareholders at no more than 15% (a rate that may be less than the owner-employees would pay on additional compensation).
Be charitable
If the business can afford it, gifts to charitable organizations can generate tax deductions. But even if no deduction is allowed (e.g., because you have already fully deducted the cost of items), consider giving away old computers, unused inventory and other items to benefit others and make room in your company for new items.
Hold annual meetings
Corporations must hold annual meetings to elect corporate officers and directors and to take certain actions. Use these meetings, for example, to authorize year-end bonuses and dividends, as described earlier, as well as to explain why earnings in a C (regular) corporation are being retained (e.g., for future expansion or to buy out a retiring owner).
Get ready for 2007
It's not too soon to begin tax planning for the coming year. For example, fix salaries and benefit programs for the coming year. In doing so, take into account the increased wage base for the Social Security portion of FICA tax; compensation up to $97,500 will cost the company up to $6,045 per employee. Explore whether new rules for retirement plans warrant action by the business. Authorize flexible spending accounts to enable staff to pay for health costs and dependent care on a pre-tax basis. Establish "accountable plans" to pay for travel and other expenses for employees to avoid employment tax on reimbursements for these costs. For more information on accountable plans, see IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses, at www.irs.gov.
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