Savvy business owners understand that the intricacies of tax planning is an integral part of running a successful small business and it’s never too early to start gearing up for the following year’s tax season. With over 20 years experience as a CPA, Marcia El-Baz is a Tax partner with New York’s venerable Lutz and Carr accounting firm. She offers expert advice that’ll help prepare small businesses owners for the coming tax season.
· Take the time to organize and maintain accurate, reliable records. This includes keeping a financial trail for business income and expenses, gathering cash receipts and disbursements; utilizing a program such as Quicken, QuickBooks or even an Excel spreadsheet to compile bazinga financial information and reconciling information with bank statements. Ms. El-Baz says, “This year the IRS will focus keenly on Schedule C filers. In the event of an audit, they will require bank statements for 14 months, including December of the previous year and the January following. It’s important to keep separate checking accounts and credit cards for business and personal expenses, so that the information is easily accessible” and to avoid discrepancies.
· Whenever possible, open a retirement account. Some plans must opened by December 31st. The Solo 401K, for example, is ideal for sole proprietors and Schedule C filers with no W2 wages. “You’re treated as both the employer and the employee and can contribute up to $15,500 of your net income and up to 20% of your profit sharing. (Double checking this year’s update).
· Take deductions for space in your home exclusively designated for your business. You can also deduct expenses such as portion of utilities costs, cell and home phones, internet and use of personal vehicle. The mileage allowance for vehicles is.48 cents per mile and depreciation coverage. Ms. El-Baz advises, “Keep a log or journal of travel and business purpose. This will help with fair, accurate estimates.”
· Create a budget for next year. In these troubling financial times, it’s important to find areas in which you can cut costs without sacrificing business development. She cautions, “Don’t forsake marketing and business development when things are going well only to play catch up when they aren’t.”
· If you need help, get it – inexpensively. If your business efforts are best served in a particular, more pressing area, consider outsourcing other responsibilities. “You don’t have to wear multiple hats. In this financial downturn, you can retain consultants and freelancers to do bookkeeping, etc. cheaply and expertly.”
· Take losses and diversify your portfolio. Yes, the market has gone further south that you’re comfortable with. However, you are allowed to take up to $3,000 of capital loss in excess of capital gains. “If you’ve had a good year otherwise, you may consider taking the losses, diversifying your portfolio and contemplating areas in which you’d like to reinvest.”
· Parents contributing to New York’s 529 College Savings Program must fund the account by year’s end in order to deduct contributions. The 529 plan offered through Vanguard is the only one that allows a deduction and tax payers can deduct contributions of up to $5,000 (for single parent) or $10,000 (for a married couple filing jointly) from their state taxable income each year for their contributions to their accounts. Tax payers in other states, should check if that state offers a 529 plan with tax advantages or other benefits not included in this program. Visit http://nysaves.uii.upromise.com/ for more information.
Ms. El-Baz also cautions against the following:
· Use family members only if they genuinely provide a service. Effective this year, while some of their income will be sheltered at a lower rate, dependents’ investment income over $17,000(Double checking amount for this year) will be taxed at the highest investment rate.
· Resist withdrawing funds from your retirement account. If it’s a loan and you can’t repay it within the time allotted, you will be paying tax and a penalty.
Here are a few additional tips and possibilities to keep in mind and discuss with your tax or financial advisor.
· Check out the first year of business depreciation tax write-off. Now entrepreneurs and small business owners can take advantage of the generous savings potential and tax benefit available with the expansion of Section 179. Your business may be entitled to a deduction of up to $125,000 on tangible personal property assets and capital expenditures. This includes office equipment, furniture, fixtures, software and storage facilities. When filing your tax return, you must complete Form 4562 for Depreciation and Amortization. You must file for the write-off in the current year as it is not retroactive unless you filed for an extension before the actual due date.
· Increase tax deductions. Itemized deductions to consider include expenses for health care, state and local taxes, personal property taxes (such as car registration fees), mortgage interest, gifts to charity, job-related expenses, tax preparation fees, and investment-related expenses.
· Take advantage of tax credits. Tax credits reduce your taxes and can include college expenses, retirement savings, and even adoption. Taking college classes also adds value to your business, increase your business acumen and capabilities. There are two education-related tax credits: The Hope Credit, for those in their first two years of college and the Lifetime Learning Credit for anyone taking college classes.