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As the millennium approaches, it makes good tax sense to use the days remaining in 1999 to find ways to reduce your April 15, 2000, tax burden. You have until December 31 to put strategies in place. Waiting until the new year to review your 1999 taxes means a missed opportunity--and more than likely, a higher tax bill.
While Republicans in Congress have been pushing for a large tax cut, they don't have the support of President Clinton. There's no chance that changes will be made in the law that will affect the figures on your 1999 tax return. Therefore, accountants recommend using the month of December to review the past 11 months of your company's revenue and expenses, find out where you stand tax-wise and determine how much you'll owe the IRS.
"The aim is to pay as little as you have to,' says Laurence Foster, a CPA and a partner in the personal financial planning practice of KPMG LLP in New York City. The government gives taxpayers some leeway by providing them with the ability to take legitimate deductions and deferrals, so why not take advantage of the opportunities you're offered?
It's also a good idea to make sure your tax-planning meshes with the long-term goals you've set for your business and your personal finances, says Debbi Jo Horton, a CPA and principal in the East Providence, Rhode Island, accounting firm DJ Horton & Associates. To reap the best rewards, make the tax-planning process a year-long endeavor. But if for some reason, you've waited until the last minute, there's still time to act. Just make your moves before the ball starts to drop on New Year's Eve. Here are some ways to make the tax laws work for you as the year comes to a close:
- Boost deductions. The more legitimate deductions you're able to claim, the smaller your taxable income and the less tax you'll owe. The best way to accomplish this if you are a cash-basis taxpayer is to pay as many business expenses as possible in 1999, says Arnold Anisgarten, a CPA and partner in the Los Angeles accounting firm Good, Swartz & Berns. (As you know, with the cash method of accounting, income is taxable when you receive it, and expenses are deductible when they are paid.)
Business owners have a host of opportunities when it comes to tacking deductions onto the end of 1999. For example, you can pay for a portion of next year's office supplies this year or pay now for a business trip you plan to take early next year. You can also prepay rent, interest charges and insurance payments.
Consider purchasing equipment for your business before year-end. The tax law makes it possible for you to deduct the full cost of the purchase rather than depreciate it over a number of years. Keep in mind that the amount you are able to deduct for qualifying equipment placed in service in 1999 is $19,000.
If you don't have the cash readily available for buying equipment, make the purchases on credit. You'll still be eligible to receive the deduction on your 1999 tax return if you place the equipment in service by December 31 of this year. Also keep in mind that any interest charges you have to pay on business-related borrowing are also deductible.
In your search for deductions, don't ignore those associated with bad debts. If you use the accrual method of accounting, and one of your clients owes your company money that you haven't been able to collect, you may be able to take a deduction for the amount of the debt. (Under the accrual method of accounting, your sales are taxable and expenses deductible when incurred.)
Accrual taxpayers who have set up a bonus plan for employees can take a deduction for the bonus this year. But there is some leeway in actually paying the bonus, says Anisgarten. You have two and a half months after the end of your fiscal year to pay bonuses to employees, as long as the employees don't own more than 50 percent of the firm. If they do, you must pay the bonus by year-end to qualify for the deduction.
And don't forget: If you're self-employed, the deduction available for medical and dental insurance premiums for yourself, your spouse and your dependents has increased to 60 percent.
- Give it away. An annual donation not only provides your favorite charity with financial help, but also gives you some valuable tax deductions. For self-employed individuals, the overall deduction limitation for charitable contributions is 50 percent of your income. But be sure to make that donation before year-end.
When deciding what you plan to donate, consider maximizing your deduction by giving appreciated assets to charity instead of selling and donating the after-tax proceeds. The amount of savings, which can be substantial, will depend on how much in capital gains taxes you would have paid on the sale.
For example, if you sell $10,000 worth of stock and give the money to charity, you may end up paying $2,000 in capital gains taxes, leaving you with only $8,000 to donate, says Foster. Instead, donate $10,000 worth of stock and let the charity sell the it. This way, you avoid paying the capital gains tax on the stock--and the deduction you receive for the contribution will be greater.
- Shift income. One way to reduce your tax liability is to transfer income-producing assets to someone in a lower tax bracket. To do this, make use of the $10,000 annual gift exclusion. You can give $10,000 ($20,000 if your spouse joins in the gift) to your children, grandchildren or anyone else you designate. These gifts remove property from your estate at no gift- or estate-tax cost.
Another useful way to shift income is to hire your children to work in your business. For children under age 18, their standard deduction will shelter the first $4,300 of wages from tax. In effect, you've shifted $4,300 of your income tax-free to each child working in your business. Keep in mind, however, that to receive a deduction for the amount you pay your children, the children must actually work in the business and receive a reasonable salary for what they do.
Horton says one entrepreneur she advises used the principles of this tax advantage while planning for the expense of his son's education. The client was a bit strapped by the cost of college for the son, who also worked part time in the family business. The main problem? The entrepreneur's income was slightly too high to qualify for tuition assistance. Horton recommended the business owner raise his son's salary. As part of this strategy, the father reduced his own compensation by the amount of the son's raise. As a result, the family qualified for tuition assistance--and the son had extra money in his pocket to put toward college expenses. At the same time, the owner increased the amount of his business deduction for wages paid to the son.
- Defer income. Try to defer as much income as possible to put off paying the corresponding tax on it for an extra year. This will leave you with extra cash to run your business.
One tried-and-true method is to defer income into a qualified retirement plan. Contributions to retirement plans are allowed to grow tax-free until they are withdrawn.
Check out the various investment options available and decide which one is best for you. These include Keogh plans, 401(k) plans, traditional Individual Retirement Accounts, Roth IRAs, and the Savings Incentive Match Plan for Employees (SIMPLE).
As far as tax year 2000 is concerned, it's a good idea to start planning as soon as possible. (It's already too late for 1999.) If you want to establish a SIMPLE plan for you and your employees, for example, you must do so by the end of October 2000 to qualify for a deduction for that year, says Anisgarten.
Joan Szabo is a writer in Great Falls, Virginia, who has reported on tax issues for more than 13 years.
Flirting With Disaster
If you suffered damage or loss to your business due to tornadoes or other natural disasters this year, you're eligible for tax breaks to offset your losses. It's possible to take deductions for the actual property loss from damage to or destruction of your business property. You'll need to have good records to claim the casualty loss deduction. Necessary documentation includes proof of the casualty, description of the damaged property, and the salvage value of the property.
Small-business owners can also take advantage of what is known as "involuntary conversion rules for disaster damage.' This provides further assistance to business owners whose property was damaged or involuntarily converted in a spot officially declared a disaster area by President Clinton.
In this case, property used in a business damaged by a natural disaster is eligible for "nonrecognition of gain" under the law, which means that qualified replacement property can be purchased and any gain can be deferred, offering tax relief to disaster victims, explains Mark Luscombe, CPA, attorney and principal federal tax analyst for CCH Inc., a Riverwoods, Illinois, provider of tax and business law information.
This provision provides relief for businesses that are forced to suspend operations for a substantial time due to the property damage, he says. If the business loses valuable customers and fails during the suspension, the owner may want to reinvest the capital in a new business venture.
DJ Horton & Associates, (401) 965-4988, fax: (401) 944-2040
Good, Swartz & Berns, (310) 477-3722, fax: (310) 312-0838
KPMG LLP, 345 Park Ave., New York, NY 10154