Q: My business has had a great year, and as a result, I'm concerned about owing a lot of taxes this year. Are there any last-minute tax tips I can use to minimize my business's tax liability?
A: Fortunately, there are a number of tax-saving strategies you can use toward the end of your business's tax year. Here are five big ones:
2. Make those equipment purchases. Accelerate planned equipment purchases (including computers and vehicles) so that your business makes them during the current tax year. If you are planning on making any equipment purchases for your business within the next few months, you may want to consider purchasing and placing the equipment into service before the end of the current tax year. This will allow your business to take a depreciation expense deduction this tax year. Alternatively, the purchased equipment may qualify for a special Sec. 179 expense deduction of up to a maximum of $24,000 for 2002 and $25,000 for 2003 ($3,060 for vehicles).
3. Practice profit management. Delay income and accelerate tax-deductible expenses to reduce your business's current-year taxable net income. If your business is expected to have significant billings to customers at or near year-end, you may want to delay these billings to reduce the current year's income. Also, you can accelerate expenses into the current tax year to maximize the current year's tax-deductible expenses. Expenses that can be accelerated include, but are not limited to, the following: year-end employee bonuses, corporate charitable contributions, 70 percent of health insurance premiums (100 percent beginning in 2003) for you as a self-employed individual, any qualified educational assistance expenses (up to the $5,250 limit) or any other tax-deductible expenses you're planning on making.
4. Lease property and equipment to your business to create tax-deductible expenses. If, during the current tax year, your business has been, or will be, using property and/or equipment that you personally own, you may be able to lease these items to your business. This creates a tax-deductible lease expense, while you take dollars out of your business in the form of lease income (not subject to Social Security payroll tax liability). Then you can reduce your taxable lease income by taking any applicable depreciation expense on your personal income tax return.
5. Order a cost segregation study to increase your business's annual depreciation expense. Consider this option if your business owns a building used for business purposes. (Typically your accountant can assist you with this.) If the cost of non-structural items, such as landscaping, site fencing, a parking lot, security equipment, etc. can be identified, these costs can be depreciated separately from the building itself, using a depreciation method with fewer years than the "39-year life" depreciation method applicable to the building. This can increase your business's annual depreciation expense deductions.
As you consider taking actions designed to increase your business's tax deductions for the current tax year and/or decrease income, remember that your goal is to minimize your business's current tax liability-without making any unwanted expenditures.
Note: The information in this column is provided by the author, not Entrepreneur.com. All answers are general in nature, not legal advice and not warranted or guaranteed. Readers are cautioned not to rely on this information. Because laws change over time and in different jurisdictions, it is imperative that you consult an attorney in your area regarding legal matters and an accountant regarding tax matters.
David Meier received an MBA in Finance from Loyola of Baltimore, and spent much of the 1970s teaching business courses; later, he created a consulting group, and for the next two decades, provided accounting and tax services to small-business owners. He is currently the founder and COO of Business Development Coaching, which provides small-business owners with ongoing business coaching and the knowledge and support required to enable them to become truly successful entrepreneurs. Visit his site at www.makeyourlifetaxdeductible.com.