6 Year-End Tax Saving Ideas For Businesses
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Here are some suggested tax moves to be taken no later than Dec. 31, 2008 for businesses on the calendar year that may save businesses income tax:
Purchase New Business Equipment
Expensing: Under the 2008 Stimulus Package, businesses can elect to expense (deduct immediately) the cost of most new equipment up to $250,000 (subject to a dollar-for-dollar reduction in that $250,000 for such purchases over $800,000). This is a one time increase in the expense level for 2008. The level will revert back to the $128,000 level (plus any cost of living adjustment) in 2009. To get the benefit for a tax year beginning in 2008, the equipment should be put into use before the end of that tax year.
Note: Many states have not matched these amounts and therefore, state tax may not allow for the maximum federal deduction. In this case, two sets of depreciation records will be needed to track the federal and state tax impact.
Timing: If you intend to purchase business equipment this year, the proper timing of purchases might, in some cases, actually increase the tax benefit you gain from depreciation of that equipment. Here's a simplified explanation:
Conventions: The tax rules for depreciation include "conventions" (rules) for determining how many months' worth of depreciation you can claim in the year you first place property in service. The conventions that come into play with equipment are...
The half-year convention: When the half-year convention applies, all property that you begin using during the year is treated as placed in service at the midpoint of the year. This means that no matter when you begin using the property, you treat it as if you began its use in the middle of the year.
Example: You buy a $40,000 piece of machinery on December 15. If the half-year convention applies, you get one-half year's worth of depreciation on that machine.
The mid-quarter convention: The mid-quarter convention must be used if the cost of equipment placed in service during the last three months of the tax year is more than 40% of the total cost of all property placed in service for the entire year. If the mid-quarter convention applies, the half-year rule is out the window, and you treat all equipment placed in service during the year as if it were placed in service at the midpoint of the quarter in which you began using it.
Example: You buy a $40,000 piece of machinery on December 15. If the half-year convention applies, you get one-half year's worth of depreciation on that machine.
Tip: Don't neglect to bring any planned equipment purchases to our attention. A careful examination of the timing of planned equipment purchases will allow you to take full advantage of these tax rules.
Other Year-End Moves
Income Delay or Acceleration. Depending on whether it's better for you, tax-wise, to delay or accelerate income, you can decide to bill clients or customers sooner (before year-end) or later (after the year-end) to accomplish your tax planning goals.
Partnership or S Corporation Basis. Partners or S corporation shareholders in entities that have a loss for 2008 can deduct that loss only up to their basis in the entity. However, they can take steps to increase their basis to allow a larger deduction. Basis in the entity can be increased by lending the entity money or making a capital contribution by the end of the entity's tax year.
Caution: Remember that by increasing basis you're putting more of your funds at risk. Consider whether the loss signals further troubles ahead.
Retirement Plans. Self-employeds who have not yet done so should set up self-employed retirement plans before the end of their individual tax year 2008.
Dividend Planning. Dividends you cause your corporation to pay qualify for the reduced 15% (or 5%) rate in the hands of stockholders, including you as a stockholder. Such a dividend may reduce the risk of a tax on accumulated corporate earnings or an IRS claim that compensation to company executives was excessive and so partly nondeductible.
Budgets. Although the need for a business budget may seem obvious, many companies overlook this critical business planning tool. Therefore, a brief reminder may be in order at year-end. A budget is extremely effective in making sure a business has adequate cash flow and, thus, in ensuring a business's financial success.
That's why every business, from the smallest to the largest, should have a budget. Once the budget has been made up, then monthly actual revenue amounts can be compared to monthly budgeted amounts. If actual revenues fall short of budgeted revenues, expenses must generally be cut.
Tip: Each year-end, business owners should get together with their accountants and budget (project) revenues and expenses for the coming year. Amounts can be broken down to cover monthly or even weekly periods, depending on the business's needs.
These are just a few of the year-end planning tax moves that could make a substantial difference in your tax bill for 2008. As stated above in regard to individual tax planning, do not act on these suggestions without consulting us first. They are general in nature, and your specific tax or financial situation may require special planning.
