It's that time of year again--time for some last-minute strategies to reduce your tax liability and keep cash flow humming in your business. But to reap the benefits of these moves, it's important to act by December 31. Waiting until April of next year means a missed opportunity--and, in all likelihood, a higher bill from the IRS.
Despite all the election year talk about tax cuts, rates for 1996 are unchanged. The top corporate rate, which many companies are required to pay, is 35 percent. For small-business owners who file tax returns as individuals, such as sole proprietors and partners, the top individual tax rate is 39.6 percent.
"Review the Past 11 months of your company's revenue and expenses, and project your tax liability for the year," advises Allan Zachariah, tax director of the Atlanta office for accounting and consulting firm BDO Seidman LLP. Doing such a projection, Zachariah explains, will help determine how to minimize your taxable income.
Small firms typically have a lot of ups and downs from one year to the next. "If you make a lot of money one year and have to pay taxes on all that profit, your business won't have the reserves needed to tide you over in some other year when business may not be as good," says Susan Jacksack, small-business analyst with CCH Inc., a provider of legal, tax and business information in Riverwoods, Illinois.
This year, small-business owners have some new planning considerations and the chance to save more on taxes, thanks to some changes recently enacted by Congress. For example, if you intend to buy equipment for your business, keep in mind that Congress increased the yearly limit on this business deduction to $18,000 effective next year for qualifying equipment placed in service during 1997. The limit will continue to increase incrementally each year until it reaches $25,000 by 2003. (Under the law, this deduction cannot exceed the taxable income derived from your business.)
If you want to purchase equipment before year-end but cash is tight, consider charging it. As long as you place the equipment in service by December 31, you can still take the deduction for 1996 even though you won't start paying for it until next year.
Another key change that affects planning for small firms is a provision in the new Health Insurance Portability and Accountability Act, which allows a limited number of self-employed individuals and employees who work for small businesses to establish medical savings accounts (MSAs) under a four-year pilot program starting next month. Contributions made to these accounts are tax-deductible, earnings on the MSA are tax-deferred, and distributions are tax-free if they are used for qualified expenses.
MSAs are available to companies with 50 or fewer employees as well as self-employed and uninsured individuals. Since only 750,000 individuals (not including the uninsured) nationwide will be allowed to establish MSAs during the four-year experiment, Jacksack recommends entrepreneurs interested in setting up an MSA next year take steps now and contact health insurance companies marketing these plans to get information.
Beyond these recent changes, your aim this year is to recognize income (if your tax bracket is low) or pile on the deductions (if your bracket is higher), advises Jacksack. Another tried-and-true rule, whatever your tax situation, is to defer taxes whenever possible. Says Jacksack, "Taking steps to reduce or defer taxes is a good way to cut business costs without hurting the quality of your product or service."