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A half dozen year-end tax tips for small business owners
Money ManagementMonthly financial advice |
Now is an opportune time to start thinking about year-end tax planning for your business. These six tax strategies, brought to you by the Maryland Association of CPAs, can be put into effect to reduce your tax liability come April 15.
1. Save for retirement
Contributing to an IRA, Keogh, SEP (simplified employee pension), or other retirement plan is one of the best ways to reduce your taxable income and secure your financial future. While you have until your federal tax filing date to contribute, the sooner you make your contribution, the more you'll benefit from tax-deferred compounding.
The rules, contribution limits and deadlines differ depending on the plan you choose. A CPA can help you determine the best option for you.
2. Buy necessary equipment
If you are thinking about upgrading your computer system, purchasing furniture or buying machinery or other equipment for your business, purchasing it now will enable you to write off the costs against this year's income. The Section 179 deduction permits you to "expense" or fully deduct up to $108,000 of qualified equipment purchases in 2006. New and used equipment qualifies, and if you're short of cash, you can finance the purchase.
Bear in mind that you must put the equipment into service before Dec. 31 to qualify for the write-off on your current-year tax return.
3. Time your income and expenses
Many small businesses use the cash method of accounting. If yours is one of them, you have some flexibility in timing income and deductions. This can help you reduce, or at least defer, paying taxes on your profits.
The easiest way to do this is to hold off on sending out invoices until very late in the month so that you don't receive payment until next year. On the expenses side, wherever possible, try to accelerate deductions before the end of the year by stocking up on supplies, paying employee bonuses, making charitable contributions and prepaying January bills during the last quarter of the year.
4. Put your children to work
Rather than paying your children an allowance, putting them to work for your business allows you to deduct the money you pay them from your taxable income. If you operate a sole proprietorship, you don't pay Social Security or federal unemployment taxes on wages paid to your child under age 18.
A dependent child with no investment income can "shelter" up to $5,150 of earned income in 2006 before he / she has to file an income tax return. Just be sure that the wages you pay are reasonable for the work done by your child.
5. Learn more about the home office deduction
Depending on how you use your home for business, you may be able to deduct a portion of your rent or mortgage payment, property taxes, utilities, and maintenance and repair costs. The rules are complicated and you'll want to check with your CPA before proceeding, but if you qualify, the savings can be substantial.
6. Keep track of deductible expenses
Even if you don't take the home office deduction, there are many expenses you can deduct to lower your tax bill. Examples of deductible expenses include what you pay for office supplies, advertising fees, professional services, business insurance, phone and Internet, postage and shipping, magazines and journals related to your work, and 50 percent of the cost of meal and entertainment expenses associated with the conduct of your business. Just be sure to hold onto your receipts and keep accurate records of what you spend.
Meet with your CPA
The MACPA says it's a good idea to meet with a CPA as soon as possible in the final quarter of the year so you can be sure you do not miss out on any deductions you are entitled to claim. Working with your CPA, you can make the most of these and other year-end tax-saving strategies.
Only CPAs are equipped to address your full range of financial needs with integrity and insight. In Maryland, CPAs must pass a rigorous two-day examination, adhere to strict ethical and professional standards, and, beyond college, complete 80 hours of continuing education every two years to be certified by the state — accountants do not.
Your doctor is certified; your lawyer is certified. Make sure your accountant is a certified public accountant.
For CPA referrals in your area, contact the MACPA at (410) 296-6250 or click here.
The Maryland Association of Certified Public Accountants (MACPA) is a statewide professional association that provides leadership, information and services for its nearly 10,000 CPA members, who are employed in private practice, industry, government and education. CPAs are business and financial professionals who have passed a rigorous two-day examination in order to be licensed by the state. CPAs are committed to protecting the public interest, and must adhere to stringent ethical and professional standards and continuing professional education requirements.