As 2002 winds down, it's a good idea to review your tax situation. With several new provisions in effect, there are plenty of deductions and deferrals to take advantage of.
"With declining income tax rates, entrepreneurs with limited liability companies, S corporations, partnerships or sole proprietorships who file individual returns will probably do well to defer as much as possible into next year when the rates will be even lower," says Arnie Koonin, tax partner in charge of personal financial services in the Washington, DC, office of accounting firm PricewaterhouseCoopers.
For example, self-employed, cash-basis businesses can delay billing so payments won't be received until next year, advises Jennifer Jones, a CPA in Fairfax, Virginia.
Here are some other ways to make the federal tax laws work for you:
Take steps to increase deductions. The larger the number of deductions you claim, the smaller your taxable income will be and the less taxes you'll owe. One of the best ways to boost deductions for cash-basis businesses is to pay as many of your business expenses as possible during this year. With the cash method of accounting, income is taxable when you receive it, and expenses are deductible when they are paid.
To beef up those deductions, stock up on business supplies or get equipment or vehicle maintenance done this month if you planned to incur these expenses in 2003 anyway. You also will want to consider prepaying some deductible business expenses, including any rent, taxes and insurance due on the first month of the new year.
Thinking about buying some new equipment? Do it now and place it in service before the end of the year. Under the federal expensing provision, you can deduct the full cost of your equipment purchase rather than depreciating it over several years. The amount you can deduct for qualifying equipment in 2002 is $24,000. That will increase to $25,000 in 2003. The $24,000 is reduced for every $1 of new equipment in excess of $200,000.
Schedule C filers are
as likely to be audited as taxpayers filing 1040s.
Source: CCH Inc.
Beware: Under the expensing provision, you're not allowed to expense more than the amount of your trade or business income, and thus produce a net loss. Remember, you can use a credit card to charge your purchase before the end of the year and still claim the deduction in 2002--even if the bill is not paid until next year as long as the equipment is placed in service before year-end.
In addition to the expensing provision, the Job Creation and Worker Assistance Act of 2002 provides entrepreneurs with a temporary depreciation bonus. Under the new law, small firms can deduct an additional 30 percent of the cost of most new equipment purchased during a specific time period. (See "What a Relief!" for more information.)
The new laws have proved to be a good area to strengthen deductions for entrepreneurs like Terri Bowersock, founder and owner of Terri's Consign & Design Furnishings Inc. in Phoenix. Her company has already taken advantage of this temporary provision by upgrading its computer equipment. With $36 million in annual sales, the company has 17 consignment furniture stores throughout the United States and recently launched a furniture trade-up business.