A column on personal finance prepared by the Virginia Society of Certified Public Accountants
MID-YEAR TAX SAVINGS CHECKLIST FOR SMALL BUSINESS OWNERS
May 24, 2004) — Many small business owners make the mistake of not thinking about taxes until it’s time to file their returns. But tax planning is an ongoing process, and now is an opportune time to take some steps to lower your 2004 tax bill. Here is some advice from the Virginia Society of CPAs.
Make the Most of the Section 179 Expensing Deduction
Start planning now for any major business equipment purchases. Thanks to the “Jobs and Growth Tax Relief Reconciliation Act of 2003,” many small businesses will be able to immediately deduct up to $100,000 of the cost of most new and used equipment purchases or other qualified business property for 2004 and 2005. Normally, these assets must be depreciated over a number of years. But act soon — unless Congress makes the higher expensing amount permanent, the Section 179 deduction reverts to $25,000 in 2006. Also under the 2003 law, computer software, which previously had to be depreciated generally over 36 months, is now eligible for the expensing deduction.
Take Advantage of the Bonus Depreciation Deduction
If you purchase assets that exceed the $100,000 expensing deduction limit, there’s additional good news for you. You may be eligible to take a bonus first-year depreciation deduction of 50 percent of the cost of new (not used) property. The other half of the cost is deductible on a regular depreciation schedule. For this bonus deduction, qualifying property must be placed in service by December 31, 2004, so act quickly.
Plan for Retirement
Take time to make payments to your retirement plan or to set one up. Contributing to an IRA, Keogh, SEP (simplified employee pension) or other retirement plan is a great way to reduce your taxable income and plan for the future. There are different rules, contribution limits and deadlines, depending on the plan you choose. Make an appointment with your CPA to discuss the best alternative for your business.
Hire Your Children
With school vacation here, it’s time to put your children to work in your business. CPAs say that if you’re a self-employed taxpayer, you can reduce your taxable income by employing your children under-age 18. As long as your child’s tax bracket is lower than yours, this strategy enables you to shift income from your higher tax rate to the child’s lower one.
Employers who put their minor children on the payroll of an unincorporated business do not pay any payroll taxes on the income these minors earn. And the wages are legitimate business deductions as long the child does bona fide work.
Reevaluate Your Business’s Legal Entity
While small businesses often start out as sole proprietorships or partnerships, many owners eventually explore the transition to another entity. For example, if your business is not incorporated, you may want to consider the advantages of incorporating. Corporation status shelters you from some financial risks, and it’s possible you could save on taxes. Discuss the different legal entities with your CPA now so that you can have any changes in place at the beginning of next year.
Set Up an Efficient Recordkeeping System
To make the most of business tax deductions, you need up-to-date records. If you haven’t kept track of your business expenses, get caught up now.
Meet With Your CPA
Don’t wait until the busy tax season to meet with your CPA. Make an appointment now when you both have more time to discuss your business and tax planning opportunities.
The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at www.vscpa.com.
Lifetime Financial Planning, Inc.
Dean Knepper, CPA, CERTIFIED FINANCIAL PLANNER™ professional
2325 Dulles Corner Boulevard, Suite 500, Herndon, Virginia, 20171
208 South King Street, Suite 201, Leesburg, Virginia, firstname.lastname@example.org
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