Look into the tax savings available by electing subchapter S corporate status in the new year. Accountant Jones says such a step could help you reduce your payroll taxes by taking a lower salary, with the remaining profit distributed as a dividend, which is subject only to income taxes. The salary must be reasonable for the services performed and not set artificially low.
With certain exceptions, a corporation that has an S election in place does not pay federal corporate income taxes. Instead, S corporation income, losses, deductions and credits "pass through" to the owner to be reported on their individual returns, explains Mallory Collier, with accounting firm Jackson, Rolfes, Spurgeon & Co. in Cincinnati.
IRS face-to-face audits are down
from 1996 to 2001.
Source: U.S. Treasury Department
As a result, S corp income generally is taxed only once to the shareholder. With a C corporation, income is taxed twice--once to the corporation and again to the shareholders when dividends are paid.
Bowersock says using this strategy in her company at the beginning of 2002 was a huge advantage, especially with profits on the rise. "With S corporation status," she says, "we are able to avoid the double taxation we felt as a regular C corporation."
Odds and Ends
Business owners using the accrual method also have some specific tax-saving steps they can follow. Review your accounts receivable if you are an accrual taxpayer to see if anything is partially worthless. If it is, you can take a deduction for a portion of the amount of the uncollected debt. Check with your accountant to determine whether you meet IRS requirements to claim a bad-debt deduction.
Also scrutinize your inventory for obsolete items. If you dispose of the inventory or sell it below cost by the end of this year, you can receive a deduction.
Another strategy for businesses using the accrual method is to delay shipping products or providing services until the beginning of your 2003 tax year.
of revenue collected by the IRS comes from small businesses and self-employed taxpayers.
Source: CCH Inc.
Be sure to take full advantage of qualified retirement plans, such as 401(k) plans, Simplified Employee Plans (SEPs), Keogh plans and Savings Incentive Match Plans for Employees (SIMPLE). With a SEP, for example, you have until the due date of your return (including extensions) to set up the plan for 2002 and make contributions of up to 25 percent of compensation, Collier says.
If you set up a pension plan this year, you are eligible for the small employer pension plan start-up credit for up to 50 percent of up to $1,000 of qualifying administrative and retirement education expenses incurred.
Fund charitable donations. While donating appreciated securities to charity worked well in the past when the stock market was bullish, this year you will want to "sell losers, claim the loss on your personal return to offset any capital gains you have, and give cash to charity instead of securities," recommends Marty Janowiecki of PricewaterhouseCoopers.
Once you've exhausted the capital gains to offset your losses, it's still possible to use $3,000 of capital losses each year to offset other types of income, such as interest, dividends, wages or earnings from your business.
If you haven't already done so, consider establishing a flexible spending account for medical expenses. These plans help your employees deal with the increasing cost of medical expenses, Janowiecki explains, by letting them set aside pre-tax dollars for expenses such as deductibles and copayments that aren't covered by medical insurance.
You can also start a gifting program for your children or other relatives or friends. For 2002, the annual amount you can give tax-free has increased from $10,000 to $11,000 ($22,000 for married couples).
While tax planning should be a task you handle year-round, don't despair. There's still enough time remaining in 2002 to make some smart tax-saving moves that will help reduce your overall federal tax liability for this year and next.