subject: Top Business Deductions: Small Business Tax Planning [print this page] Top Business Deductions: Small Business Tax Planning
The end of 2010 will be upon us in about a month and, amid the feasting and gifts, we should perhaps give some consideration to our business taxes for the year. As a self-employed business owner, you've already put some tax-planning strategies to work for you but let's take a closer look at a few methods which are proven to lower the burden of your business taxes.
Set Up a Retirement Plan
As you already know, you do not pay any taxes on income you put into your retirement plan. Those earnings will grow tax free, until you start making withdrawals from it when you retire. Consider the following options;
- SEP Plan. Designed for the self-employed business owner with less than 25 employees, the contribution limit for 2010 may not exceed the lesser of either $49,000 or 25% of an employee's 2010 compensation;
- Keogh Profit-Sharing Plan. The contribution limit is similar to the SEP in that it may not exceed the lesser of either $49,000 or 25% of an employee's 2010 compensation;
- Solo 401(K) Plan. Your contribution limit is $16,500 of your pre-tax income. But if you are over 50, you can make an additional contribution of $5,500 which would total $22,000 for 2010.
As the employer, you can also make a 2010 profit-sharing contribution of up to 25% of your pay, as long as it does not exceed $49,000 and that's in addition to the limit of $16,500 mentioned earlier.
Here are some more tax-reducing tips to consider,
Section 105 HRA Plan. This is for married business owners who have high health, and dental insurance premiums and out of pocket medical expenses. You can then hire your spouse as an employee of your business.
Be Your Own Beneficiary. As your employee, your spouse may add you and any children you have as beneficiaries. You can deduct your medical bills and hospital insurance as business expenses without having to itemize all the deductions.
Hiring Your Spouse. Ensure that he or she is doing a bona-fide job in your business; one which adds value and pay him or her, a reasonable salary. Maintain good time records and a job description which detail those duties performed.
Hiring Your Children. This is a great way to save on business taxes if your children have not yet reached the age of 18 years! When hiring your children, you must ensure that the work they perform is bona fide and adds value to your business. Pay them a reasonable wage and maintain good records of time worked, etc. The benefits are -
- You can deduct your child's income as a business expense,
- Your 18 year-old child's income does not attract Social Security or Medicare withholdings,
- You can move income from your higher tax bracket to your child's much lower tax bracket.
Section 179 Deduction. You can write off the full purchase price of qualifying equipment which was purchased or financed during the year it was purchased instead of depreciating it over its life.
Choosing Section 179 Deduction Over Depreciation. Purchasing equipment required for the business and stocking up on office supplies and other necessities are great ways to accelerate your deductibles. You can also choose to apply any Net Operating Losses (NOL) and/or make an extra charitable contribution which will reduce your taxable income further.
Income Deferment. Consider this! If you expect your next-year's business taxes to be lower than this year's, you can defer income into that year while accelerating deductibles. This will lower current taxes and will defer any tax liabilities into the following year.
Cash Based Accounting. If this is the method you use in your business, a way to defer income into next year is to invoice your customers at the end of this year December 31. This way, they pay you in January/February of next year, resulting in those revenues not being recognized in this year.
Accelerating Your Income. If you anticipate being in a higher tax bracket for next year, you do the exact opposite of the above. You can write off obsolete, worthless or damaged inventory as a business expense and at the same time, accelerate your income into this year to benefit from the lower tax rate and defer your deductibles.
Home Office Deduction. If you have a part of your home set aside as a business office, you may be able to write it off as an expense. You will have to adhere to the requirements for a home-based office (go online and see Form 8829 at www.irs.gov). The deduction you take may not exceed the income from your business.
Avoid Tax Penalties. Those penalties can add up!Consider using the Electronic Federal Tax Payment System (EFTPS). This is a great tax payment idea and it helps you to avoid late filing. Best of all, it's free from the U.S. Department of Treasury.
Next Year and Beyond. Your business will become more profitable as time goes on. Consider incorporating it there are two types of incorporation to examine.
S-Corporation. Choose this, if the following conditions apply to your business,
- you foresee business losses in the future;
- public financing is not something you need;
- you are not in the highest tax bracket for individuals;
- you have hefty capital gains and qualified dividend.
C-Corporation. Considerthis one if these conditions apply to your business,
- you require public financing;
- you are in the highest individual tax bracket;
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Disclaimer
The foregoing is intended for educational purposes only and does not constitute legal or professional advice. Nothing contained herein is intended to be used, or can be used, by any person to avoid penalties that may be assessed under federal or any state law.
