The end of 2009 has reminded many small business owners of the impending deadline to file tax returns. Naturally, sharp business owners are racking their brains (and their accountants') for ways to minimize their tax burden. The Internal Revenue Code is bewilderingly complex, replete with loopholes, deductions, exemptions and technicalities that even those who study it for a lifetime may never fully master. But don't lose hope! Our labyrinthine tax laws offer plenty of opportunities for small businesses to ensure they aren't paying a cent more than they owe.
Defer Receiving Income
One of the perks of running your own business is being able to decide when you receive and acknowledge income on your books. Now, it goes without saying that you should be honest and truthful no matter what. However, it is a well-known tax minimizing tactic to defer year-end income until the first week or two of January. The practical effect of this manuever will be that all income received in January 2010 will need to have taxes paid on it in April 2011, rather than April 2010, which would be the case if you receieved the income in December 2009. Sole proprietors, LLCs, and S corporations can all utilize this year-end strategy for minimizing their upcoming tax bills.
Group Needed Expenses at Year End
First, allow us to preface this tip with a warning: we are not advising that you simply go hog wild at the local Office Depot, buying up supplies for no other reason than tax avoidance. Your overall goal should always be revenue and profit maximization, not tax minimization. Rather, we are simply pointing out that purchasing items your business justifiably needs at the end of the year can pad your deductions, allowing you pay taxes on less income in April 2010. The correct approach here is to inventory what your business actually needs to purchase and commit to buying all or most of it before January 1. Office supplies, bill pre-payment, furniture, travel bookings, repairs and maintenance all qualify.
Write Off Worn-Out Inventory
If your business traffics in physical inventory, late December is the perfect time to inventory your goods for any that have been damaged or become obsolete during the course of 2009. Any reduction in the market value of these outmoded goods equate to more deductions for your business, of which there can never be too many. Be careful, however - many business owners try to stretch the meaning of "damaged" and "obsolete" beyond what the IRS would interpret. Always observe (for this tip and the others) the old saying "pigs get fat, but hogs get slaughtered."
Contribute to Retirement Plans
Tax-exempt or tax-deferred retirement plans are one of the most potent weapons in a small businesses' tax avoidance arsenal. If late December has you scrambling for ways to make a dramatic income in 2009's taxable income, look no further than your company's 401(k), IRA, KEOGH or SEP. All of these defer taxation in one way or another (with different implications for your business depdending on your own structure and priorities), and if you can max out your allowable yearly contribution, you will avoid paying taxes on the full amount of that income. Don't have one already? Set one up -- accountants are perfectly willing and able to accomodate such requests late in the year, as they are fully aware of the tax benefits.
Inventory and Deduct Allowable Auto Expenses
If your business has you on the road for work-related activities, you personally are entitled to deduct the costs of such travel. There are two methods of deducting auto expenses. First is the actual expense method, which mandates that you track and then deduct all your documented business-related auto expenses. Second is the standard mileage rate method, where you deduct a certain amount for each mile you drive, plus all business-related tolls, parking charges, etc. The 2009 standard mileage rate is 55 cents per business mile. Which method is best depends on your business. Generally speaking, a newer car used mostly for business will see a larger deduction from the actual expense method. Also remember that if you use a car for business and personal activities, only the business-related usage can be lawfully deducted.
Write Off Business-Related Education
An under-utilized small business deduction comes in the form of work-related education expenses. If you go back to college for a management degree, for instance, or attend seminars or training to improve your marketable skills, these costs may be written off on your tax return. Note, however, that education meant to prepare you for a new job or business in which you are not working in at time of filing may not be deducted. This exemption applies only to education that bolsters your prospects in current business pursuits.
Deduct Bad Debts
No business likes getting stiffed, but tax season offers you the opportunity to deduct such costs from your taxable income. Generally speaking, your business can deduct he cost of goods you sold, but were not paid for. Unfortunately, service businesses do not have this exemption - services you render but are not renumerated for are not eligible for write-off. Documentation to save here include e-mails between you and the deadbeat, transcripts of phone calls, and anything else that can help prove you were stiffed.
Deduct Reasonable and Appropriate Business Entertainment
Within tightly circumscribed limits, the IRS permits business owners to deduct some of the costs of business entertainment. The rule of thumb is that you may deduct 50% of such costs provided that business is discussed while the entertainment is being enjoyed - for example, a catered meeting in your conference room. Entertainment costs can also be deducted provided that it takes place immediately before or after a business discussion. Be advised that documentation is the name of the game when it comes to entertainment deductions. If you go out for a business lunch, for instance, scribble "lunch with Randy Marsh of Entourage Group regarding affiliate marketing proposal" on the receipt to establish a paper trail.
Deduct Business Travel Expenses
We have already noted that it is prudent to book upcoming business trips before December ends to maximize deductions. It is also worth knowing that business travel in general, at any time, may be deducted, provided the deductions pertain to strictly business-related costs of the travel in question. As long as business is the "primary purpose" of the trip (to quote the IRS), all costs, from plane fare, car mileage, taxi service, hotels, food, dry cleaning and Internet service may be deducted. If your family accompanies you, however, only your own expenses may be written off.
Deduct Interest Payments
Many business models involve use of credit or debt financing on an ongoing basis. Luckily for such business owners, the associated costs may be written off in full. This includes all interest, points, fees and carrying charges connected to any debt financing your business utilizes to operate. The same applies for taking out personal loans and using the proceeds for business purposes. Again, accurate record keeping is paramount. Don't allow yourself to be backed in a corner by the IRS where your only recourse is verbally claiming to have incurred all the interest you claimed on the return. Document relentlessly the fact that all claimed deductions were used for the business.
Make Charitable Contributions
It is sometimes prudent to make year-end charitable contributions as a way of reducing your upcoming tax bill. Partnerships, LLCs and S corporations (which are taxed like partnerships) are eligible to donate to charity, while you personally claim the deduction on your own return. C corporations can only deduct the value of the donation at the corporate level. Regardless of the structure within which you operate, charitable deductions offer a relatively straightforward way of trimming your tax bill before New Years day.
Write Off Applicable Taxes
Believe it or not, businesses can actually write off taxes incurred in day to day operations. The nature and extent of the deductions, however, depend on the type of tax involved. Sales taxes on items purchased for day to day operations (like office supplies) can be deducted as part of the item's cost. Thusly, a $50 purchase of printer paper can become a $55 deduction if you were assessed a $5 sales tax at the register. However, a major business purchase (like a mainframe computer) must have its sales tax added to the cost basis of the item - in other words, it will not be deductible in full during the year in which it was purchased. Fuel taxes are separately deductible, and the employer's share of employment taxes are deductible as a business expense as well. Note that self-employment taxes are not considered business expenses (and thus are not deductible) as they incurred by individuals. State income taxes can be deduted on your company's federal return as an itemized deduction, while real estate taxes on business properties may be deducted as well.
Buy Advertising Before Year End
Business owners should know that the costs of advertising and promoting their businesses can be written off. Anything from business cards to Yellow Pages ads to pay per click marketing campaigns may be deducted on the company tax return, provided these costs are documented in a straightforward manner. Even indirect forms of advertising count, such as sponsoring a youth sports team or adorning the side of a race car with the name of your business. Keep a uniform or photograph of the promotion handy in case the IRS comes knocking and you're good to go!
Document & Deduct Legal Expenses
Lawyers may be seen as a necessary evil in many industries, but you should know that the cost of using their services is generally deductible for your business. If you are sued, or need legal assistance in routine matters like incorporating or drafting contracts, your legal bill can translate to paying taxes on that much less corporate income. Be sure to save any invoices, bills and other materials pertaining to your legal bills to minimize headaches in the event your deductions are challenged.
Employ Your Kids
S corporations and C corporations can reap significant tax benefits from employing their children. Essentially, these benefits derive from shifting a certain portion of corporate income into a lower tax bracket -- that of your child. Any amount you choose to pay your offspring for their help around the shop or office is taxed at their tax bracket. Furthermore, you also receive a larger tax deduction for dependents who earn wages than those who do not. Provided there is work for them to do, employing your kids can be a major boon come tax time! Just don't get greedy - the IRS will most certainly question attempting to pay your 10 year old son $100,000 for stapling some papers together in your office!