|Robert Lee Riley CPA, MBA-tax
Year end tax planning
As we enter the latter part of the year, itâ€™s time to take a closer look at
your businessâ€™ financial situation and consider potential tax savings
As you evaluate potential credits and tax-minimization opportunities, keep
in mind that the application of various strategies may differ depending
upon your businessâ€™ unique situation and accounting methods. The
cash method allows for deductions and income reported for the year they
are paid and received, while the accrual method applies income and
expenses in the year incurred. As always, you should consult with your tax
attorney, preparer or advisor.
Some tax-saving tactics and strategies worth considering include:
â€¢Defer recognition of incomeâ€”If your cash flow permits, any
payments your company can receive in January, as opposed to
December, will reduce the current year tax burden. When using this
strategy, the companyâ€™s entity structure and annual profits and losses
should be considered.
â€¢Contribute to a retirement planâ€”Make payments to an existing plan,
or set up a plan prior to year-end. Contribution limits vary depending upon
the plan type. There are numerous retirement plan options to choose
from; it is recommended that you choose the plan that best fits your
business, number of employees and retirement goals.
â€¢Pay discretionary bonusesâ€”If youâ€™ve had a good yearâ€”even in
this tough economyâ€”and want to reward employees (provided your
accounting is done on an accrual basis), accrue year-end bonuses.
Deductions may be allowed for accrued bonuses to employees as long
as they are paid within two and a half months of year end (March 15 for
businesses with a December 31 year-end).
â€¢For bonuses given to owners:
â€¢S corporations may deduct bonuses for shareholders or owners who
have any percent ownership when bonuses are paid.
â€¢C corporations may only deduct bonuses for shareholders or owners
who have 50% or more ownership when bonuses are paid in order to get
â€¢A note on cash basis accountingâ€”For those using cash method
accounting, the bonus must be paid in that year to be deducted in the
â€¢Make additional charitable contributionsâ€”If possible, make
contributions prior to the beginning of the next year, so they may be
deducted in the current tax year. Be sure to retain receipts.
â€¢Incur expensesâ€”For cash-basis taxpayersâ€”cash flow permittingâ
€”pay as many expenses as possible prior to year end to maximize
deductions. Examples include:
â€¢printing new marketing collateral,
â€¢office supply purchases and
â€¢equipment purchasesâ€”In this case, you have multiple write-off
options (Section 179 deduction discussion below). The equipment must
be in your office and in use by year-end.
â€¢Write off uncollectible accounts (bad debts)â€”The IRS allows
deductions for actual write-offs, not those allowed for in your â
€œallowance for doubtful accounts.â€� If the item is truly a bad debtâ€”
meaning youâ€™re able to show youâ€™ve tried to collect the debt and
payment is unlikelyâ€”go ahead and write it off. Note: Only businesses
using the accrual method of accounting can write off bad debts.
â€¢Write off obsolete inventoryâ€”If you have inventory, update your
records, write off any obsolete or damaged inventory.
â€¢Certain types of tangible personal property are eligible, such as
furniture and fixtures and machinery and equipment. The limit on first-year
depreciation for certain types of passenger automobiles was raised by
$8,000 under the American Recovery and Reinvestment Act. Real property
and investment property are not eligible.
â€¢Section 179 Expense Deductions canâ€™t be used to make
business income go negative. Deductions that reduce income below zero
can be carried forward for an unlimited number of years to a year when
the business has positive income and can be applied to that year.
â€¢Perform a cost-segregation study if you own real estateâ€”If you own
real estate or build a building, consider taking advantage of a cost-
segregation study, which can accelerate depreciation and increase cash
flow. (To learn more, check out the IRSâ€™s â€œCost Segregation Audit
â€¢Work Opportunity Tax Creditâ€”Under the Work Opportunity Tax Credit
(WOTC), an employer can claim a tax credit for wages paid to members of
certain â€œtargetedâ€� groups. Generally, the maximum credit is $2,400
per employee (or 40% of wages, whichever is less.) The WOTC now
includes the following in â€œtargetedâ€� groups: unemployed veterans
and disconnected youths.
Careful planning is the best way to capitalize on available opportunities.
There are many other potential tax-optimization strategies that may apply
to your business entity. Consult a qualified tax professional about your
unique circumstances when evaluating the strategies that are best for