11th Hour

Your best bet for 1997 is to follow what are considered tried-and-true strategies to trim your tax liability.

For taxpayers using the cash method of accounting, "see where you are at year-end so you can accelerate your expenses for this year and push income into the new year," says Robert Webb, director of the tax department for the Denver accounting firm Gelfond Hochstadt Pangburn & Co. Your aim is to reduce or defer taxes until 1998 or beyond. Under the cash method, income is taxable upon receipt, and expenses are deductible when paid.

One way to move income into the new year is to mail your invoices at the end of December so you don't receive payment for your products or services until next year. To boost your expenses, consider buying any needed equipment before year-end. The yearly limit on the deduction for qualifying equipment placed in service in 1997 is $18,000--$500 more than in 1996. Keep in mind, the deduction can't exceed the taxable income derived from your business. You can also accumulate expenses by stocking up on business supplies, having business repairs done and giving holiday gifts to clients. The deduction limit for client gifts is $25 per recipient.

Taxpayers who use the accrual method of accounting can also reduce their taxes. "While it's more difficult to manage the bottom line for accrual taxpayers, there are still tax-saving steps to follow," asserts Mark Dow, a tax partner in the St. Louis office of Coopers & Lybrand LLP. With the accrual method, sales are taxable and expenses deductible when incurred.

Accrual taxpayers may want to establish an employee bonus plan. This allows a business owner to take a deduction this year for the cost of the plan, but the bonuses don't have to be paid until 1998. Under the law, you have two and a half months after your fiscal year-end to pay the bonuses to employees, as long as they don't own more than 50 percent of the firm. If they do, you must pay the bonuses by year-end to get the deduction.

Both cash- and accrual-method business owners in search of deductions should consider making a charitable donation by December 31. A corporation can deduct up to 10 percent of its net taxable income for charitable contributions. Be sure the charity provides you with written substantiation of the amount contributed if it totals $250 or more.

If you changed your residence this year because of your business, you may be able to deduct certain moving expenses if you satisfy the IRS distance and time requirements. Deductible expenses include the costs of moving household goods and traveling to your new residence. Pre-move house-hunting expenses or temporary living expenses don't qualify.

Also, if you spent time this year looking for a business to purchase but did not purchase one, the expenses you incurred during the search are deductible. If you did purchase one, you cannot deduct search expenses, but you may deduct start-up expenses over the course of at least 60 months.

Another deduction relates to bad debts. If you're unable to collect money from a customer, you can claim a deduction for that amount if you've paid taxes on it. The IRS allows accrual taxpayers to deduct a bad debt in the year that it becomes partially or totally worthless. To prove your deduction, you'll need records showing when your collection efforts ceased and the debt was written off.

If you're self-employed, monitor your estimated taxes, says Dow. "If you are falling short in terms of required estimated tax payments, then increase your withholding by year-end," he says. The law requires estimated tax payments to add up to at least 100 percent of last year's tax or 90 percent of the tax you will owe in 1997 (whichever will help you avoid a penalty). Note that a special rule applies to individuals with adjusted gross income (AGI) for the previous year in excess of $150,000. To qualify for the prior year's safe harbor, these high-income individuals must pay 110 percent of the prior year's tax instead of 100 percent.

This article was originally published in the December 1997 print edition of Entrepreneur with the headline: 11th Hour.