December provides an opportunity for entrepreneurs to think creatively-not about gift-giving, but about lowering this year's tax bill. There's still time. If you use the cash method of accounting for tax purposes, you can manipulate the timing of both your income and expenses. Do you expect a lower marginal rate next year? If so, delay income until 2001 and accelerate expenses into this year. (Reverse that ploy if you expect higher marginal rates next year.)
On the income side, for example, hold off on sending invoices until January. If payment is not received this year, it is not reportable as year 2000 income. To accelerate deductions, pay bills in advance. Whether paying by cash, check or credit card, you get the deduction if the transaction is posted this year. However, you may not deduct prepaid expenses that deliver value more than 12 months past year's end, such as subscriptions or insurance premiums.
Are you a sole proprietor? Section 179 of the tax code allows you to write off the entire cost of new or used equipment bought this year, up to $20,000. Even equipment bought at month-end is 100 percent deductible if the item is used for business more than 50 percent of the time. If it's also put to personal use, only the business percentage is deductible.
Finally, you still have time to establish a retirement plan. Open a year 2000 Keogh by December 31; the contribution deadline is the same as your tax due date. SEP and IRA plans can be opened and funded as late as your due date. Max out all retirement accounts. Remember, every dollar of additional tax deduction results in a dollar of lower taxable income, notes Windsor, California, CPA Norm Ray.
"When you combine the federal income tax rate (generally 15 to 40 percent), any state and local income tax rates, and the 15.3 percent Social Security tax rate on self-employment income, the overall taxation rate is very significant," says Ray, also the author of Smart Tax Write-Offs (Rayve Productions), which contains hundreds of creative tax-deduction ideas for entrepreneurs.
Whatever you do, just don't do nothing. "It's smart to aggressively identify potential business write-offs so that none are overlooked," Ray advises. "No one knows the intimacies of a business as well as the owner, so it is extremely important for the owner to identify the potential write-offs."
Paul DeCeglie , a freelance business writer based in Los Angeles, is a former reporter for American Banker and Journal of Commerce.