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.
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Here are some other ways to make the federal tax laws work for
you:
Great Expense
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
3
times
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.
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