You may think that the days leading up to April 15, 2009, will be a scramble of locating receipts and cursing yourself for not keeping better records, but there is also the likelihood you will kick yourself for not doing more in 2008 to lower your tax bill. Fear not, because there are ways -- some quite simple -- to maximize the few days left of this year in order to minimize what you will owe 3-1/2 months from now.
The No. 1 recommendations made by many tax experts is to make capital investments now rather than put them off. A change to the 2008 Federal Tax Code has resulted in a historically high write-off maximum of $250,000 for tangible property. So now could be the time to do that much-needed upgrade of your equipment, such as computers, telephone systems, even furniture. All of your business-related gear is deductible, there are tons of sales going on, and if you charge the purchases to a credit card, you can claim the deductible for this year yet not have to pay off the charge until next year -- and, as tax attorney Roni Deutch points out, you might even qualify for credit card rewards.
Also, go green where you can, since tax credits are available for certain energy-saving purchases -- from installing solar panels and solar hot-water heaters to purchasing alternative-fuel vehicles. Check out the IRS's Web site for a list of the credits available for different electric and hybrid car models.
There is a caveat to the recommendation of making business purchases this year, however. Barbara Weltman, a tax expert for small businesses, says that because of the recession, we're in a unique situation: "Many businesses weren't profitable. So the conventional approach -- buying up supplies by the end of the year -- would not apply this year." Weltman suggests waiting until next year to make large purchases if you think your business is going to make more money then.
The flip side to that, Weltman says, is do your best to send out invoices in the remaining days of December because maybe -- maybe -- you'll get paid this year. "Get the money when you can, since you don't know when people will be able to pay you," she says.
Expenses To Make Now That Could Result In Deductions On April 15
Here are some other expenses tax experts recommend you consider making by Dec. 31 that could add up to more deductions next year:
- Donate to charities. For a hefty donation, consider charging it to a credit card and paying it off in 2009. Otherwise, making a tangible donation can also declutter your office. "In this environment, people should think about cleaning out their closets and giving away clothing and furniture to charity," says John Hewitt, CEO of Liberty Tax Service. Donating a working computer is eco-friendly and will earn you a deduction. Another charitable recommendation from Weltman is to create a leave-based donation program for your staff -- they forgo personal time off, and you donate those funds to relief efforts for a charitable contribution deduction. Weltman points out that because the money isn't taxed as compensation to employees, your business avoids payroll taxes you'd otherwise owe.
- Pay off accounts receivable. If you are on the cash method of accounting, Weltman says, settle up outstanding receivables by Dec. 31 so you can deduct the payments next year. The bonus is you'll preserve your good credit record.
- Make your next mortgage payment now so that you can take a higher interest deduction. But, warns Deutch, remember that that would be one less mortgage payment to claim next year.
Distribute profits. If you're one of the few businesses that did well this year, Weltman recommends paying out earnings -- and taking a deduction -- through bonuses to your staff. And corporations should consider distributing profits as dividends to owners.
- Prepay state and city taxes, since they're deductible for this year.
- Consider maximizing 401(k) contributions before year's end. The deductible amount for a contribution to a traditional IRA is up to $5,000 per person and up to $6,000 per person age 50 or older.
- Make health savings account (HSA) contributions this month in order to make a year's worth of deductible HSA contributions for 2008.
And if it's too late for your business to salvage 2008, Weltman's No. 1 piece of advice for smaller companies to practice throughout the year is to keep good books and records. The better record-keeping, she says, the easier it is to find items to write off. "If you don't keep records," she warns, "you won't be able to name write-offs, even if they're perfectly legitimate."
Also, don't forget that the incoming Obama administration could also have tax implications next year.
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Jennifer Moline is associate editor of bMighty.com.