Pick and Save

Don't wait until the last minute to save big on your 2008 taxes. Here's what to watch out for.
Magazine Contributor
4 min read

This story appears in the April 2008 issue of Entrepreneur. Subscribe »

If you just filed your 2007 tax return and are still smarting over lost opportunities to reduce your debt to Uncle Sam, it's time to think positive. You can change the picture for 2008 if you incorporate tax planning into your overall forecasting and strategy for the year rather than relying solely on last-minute December moves. Here are a few ideas to start saving now:

Plan big equipment purchases
Too often, business owners lose their Section 179 deduction by waiting until December to start thinking about big-ticket items, says Steven Barnes, owner of CPA firm Contemporary Accounting Services. If you know you need a major piece of equipment for your business and that the $128,000 deduction will help offset your expected profit for the year, start the process of purchasing and financing now.

Save on products sold overseas
If you have qualified foreign sales and own either an LLC, S corporation or closely held C corporation, you can set up a new corporation, known as an IC DISC, which will effectively act as your sales agent, says Todd Jackson, managing director at national tax and business consulting firm RSM McGladrey. For every foreign sale, your company pays the sales entity a 50 percent commission, for which you earn a deduction. The foreign sales entity then uses its commission profit to pay out a dividend to you, the owner. Since C corp profits are taxed at 35 percent and you're instead paying tax at the current dividend rate of 15 percent, you effectively save 20 percent on half of your export profits, says Jackson. "The IC DISC has to be set up prior to the actual sales taking place," he says, "so it's not something you can implement at the end of the year."

Reduce estimated taxes
If your business is cyclical and most of your income comes in the latter part of the year, consider switching to an annualized method of computing quarterly income and estimated tax payments. This way, you compute income based on the first quarter and annualize that to calculate your payments, which allows you to pay less in estimated taxes in the first half of the year, says Alan Olsen, managing partner at CPA firm Greenstein, Rogoff, Olsen & Co.

Get credit for your research
Though rare, you may be able to claim a credit for up to 20 percent of your business's excess expenses if your company is incurring costs for tech research or to improve a business process. Says Jackson, "You need to think about that now so you can properly document that there was research going on."

Give your kids summer jobs
Hiring your high schoolers to work in the office is a great way to pass effectively tax-free income to your kids. Says Olsen, "You get a deduction, and if you're paying your kid around $5,300 [a year], he or she will experience no tax."

Get organized
Simply put, "those who keep the best records are able to preserve the most wealth," Olsen says, noting that people typically underestimate expenses when they don't keep receipts. Carry your business credit card wherever you go and put all business purchases on it.

Pay more now, less later
While conventional wisdom tells you to hang on to your cash as long as you can, some can find a big bill at tax time too disruptive to cash flow. Consider adjusting your own salary withholdings so that you pay taxes along the way and owe less at year-end, suggests Barnes. "There is a secondary benefit, too, which is that you're putting more money away for retirement," he says, adding that plans are more likely to get funded if the money is subtracted weekly. "Before you know it, you've funded your pension before you even get to the end of the year."

C.J. Prince is a writer specializing in business and finance. Reach her at cj@cjprincemedia.com.


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