Smart Year End Tax Moves Will Pay Big Dividends
by David Lesnick
The Holidays are upon us. Everyone Is in a hurry, parties and family gatherings to plan, gifts to buy, no time to think about taxes. But a quick look at these year-end tax tips can pay you big dividends come April 15th 2004. It is often said December 31st is the longest day of the year. Any deductible bills or expenses that you that are due on January 1, should be paid in December.
Year End Smart Tax Moves
1. Defer Income: Any payments you or your company can receive during the first week of January as opposed to December cuts your tax bill. Every cent earned up to December 31st, 2002 has taxes paid in April 2003; whereas income deferred to January 2004, will not owe taxes until April 2005.
With lower income tax rates in the foreseeable new year, deferral of income makes the best sense for most sole proprietors, partnerships, LLC's and S corporations. Ensure your cash flow can handle the deferred income.
2. Increase Expenses: Now is the time to purchase items your business will require in the immediate future to maximize deductions for this year. If you can see a need for goods and services in the first quarter of the new year, buy them now, if cash flow permits. Consider the following items for expenses:
· Office Supplies: Stock up on stamps, fax paper, printer cartridges, stationary, and other office items. The office supply stores usually have great sales going on between Christmas and New Years. I usually buy items that I will using in the next 6 months. Double bonus you get it a great sale price and take it off this years taxes.
·Pay Bills Early: Pay your bills before the new year in areas such as; cell services, subscriptions, rent, insurance, and utilities. Pay January mortgage on your home. Pay any property management fees due in January.
·Equipment Purchases: If you will be buying new office equipment , consider purchasing now. Major equipment purchases can include: computers, copiers, fax machines, and furniture. A small businesses owner can deduct up to $100,000 in equipment purchases made in 2003.
You will have to decide whether an immediate write off is best or spread out the depreciation over years. Consult with an accountant to examine your circumstance and company structure to maximize your deductions. In addition, your equipment will have to be in your office, "in use" by year-end.
· Other Items: This category includes: pre-payment of subscriptions, travel bookings, equipment repairs and maintenance.
3. Inventory Write-Offs: Depending on your accounting methods, you may wish to check inventory for goods that have been damaged or have become obsolete. The drop in market value of the inventory can provide your company with added deductions.
4. Contribute to a Retirement Plan: Uncle Sam has given us another break this year by increasing the deductible amounts we may contribute. Make payments to your retirement plan or set one up before the year-end to reduce your income for this year. Check with your Financial Planner what the contribution limits are for your type of plan. Uncle Sam has also given us a new plan to add to the mix, The 401k SOLO, which has low maintenance fees and favorable contribution limits. If you are self employed and have not started a plan this could be the one for you. If that doesn’t fit we always have the KEOGH, Roth IRA, SIMPLE plan, SEP's, and Profit Sharing plans.
5. Sell Your Losers: If you have losses in the stock market now is the time to reap some tax benefits. (known as harvesting losses) If you have some winners that you want to sell offset the tax consequences by matching them with some losers. If you like any of the stocks that you are taking losses on, buy them back again after the first of the year. Remember to wait at least 30 days to comply with the “wash sale? rule.
These year-end tax tips will apply differently to each business owner's situation and accounting method. The cash method of accounting allows for deductions and income reported for the year they are paid or received. The accrual accounting method applies income & deductions in the year incurred. Take the time to review the best strategy with a professional advisor and make the most of the year-end for your business.
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