Year-End Tax-Planning Moves

By Colleen DeBaise November 16, 2006

THE CASH REGISTER is furiously ringing with holiday sales1. So who's got time for year-end tax planning? You do. Now's your last chance to take a bite out of your 2006 tax bill. Don't let a packed schedule keep you from taking advantage of every break possible.

"I tend to look at my clients' books right after Thanksgiving," says Leo Bruette, a tax partner in BDO Seidman's Washington, D.C., office. Not only can you review 11 months of business trends but you can get a clear idea of the company's profits for the full year, he says. That will dictate what steps you can take to reduce your tax load. Here are some ideas as 2006 dwindles to a close. Keep in mind, it's best to consult an accountant, as there are exceptions to every strategy. Much will depend on whether your small business uses the cash-basis or accrual-method of accounting. Also, many small businesses are S corporations or limited liability companies (LLCs), meaning income and losses are reported on the owners' personal tax returns. So your individual tax situation should be taken into consideration (particularly if you are subject to the alternative minimum tax2).

Shift income into the new year, and accelerate deductions. The concept is simple: By deferring some of your company's income, you delay paying taxes, and by boosting deductions you take advantage of the benefit sooner. You might want to delay the closing of sales until 2007, for instance, or pay January's tax-deductible health-insurance premium in December. And stock up on fax paper, calendars and other office supplies that can be written off a business expense for 2006. (Click here3 for a list of deductible business expenses.)

Adjust owners' wages for tax benefit. Salary decisions are tricky, and some owners wait until the end of the year to see what share of the profits to take. Generally, if you're an S Corporation, you want to take as little in compensation as possible, and if you're a C Corporation, you want to take as much as possible. (That's because tax consequences are different, depending on the company's legal structure.) But beware: Wages that are too high or too low may attract unwelcome attention from the Internal Revenue Service.

Upgrade your office equipment. It's not too late to take advantage of the Section 179 deduction of the Internal Revenue Code that allows small businesses to deduct upfront (rather than depreciate) the cost of equipment, machinery, furniture, software and other assets placed into service during the tax year. For 2006, the maximum deduction is $108,000.

Set up a qualified retirement plan before Dec. 31, and make deductible contributions to it for 2006. (If you want to maximize your contributions, remember you have to maximize your employees' too.) Don't have the cash to fund it now? Think about a Simplified Employee Pension Plan4, as funding can be delayed until the company's extended tax-return date. "The key thing to do is set up the paperwork by the end of the year, and this gives you more time to actually put the money in," says Barbara Weltman, author of "J.K. Lasser's Small Business Taxes 2007."

Make a New Year's resolution to keep up with new rules that could affect your bottom line. With changes in Congress, new tax laws could be looming. "We still don't know all the tax rules for 2007, so stay alert," Weltman says.

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