Last-Minute Tax Tips
If you're inclined to let your accountant do all the worrying about your business and personal income taxes, you could be making a costly mistake. “Your accountant may be the tax expert,” says Tom Normoyle, CPA, Huntingdon Valley, Pa., “but no one knows the fine details of your finances as well as you do. That's why your accountant needs your help to hold your income taxes to a minimum.”
Although filing deadlines for your 2003 tax returns are still many weeks away, you have only until December 31 to do everything you can to keep as much of your money as possible out of Uncle Sam's pocket. Here are some steps you can take now to slash your 2003 tax bill.ACCELERATE PAYMENTS AND DEFER INCOME
Tax experts agree that accelerating payment of bills and deferring income are among the most effective ways for you to reduce current year taxes.
“Pre-pay as many of your business-related bills as possible by December 31,” says Paul Rich, CPA, Siegel Rich Division of Rothstein Kass, Roseland, N.J. “Prepaying your rent and anticipating supply needs are effective ways to reduce current year's taxes.”
Rich suggests that you consider buying your first three months of supplies for next year before December 31. Also, pay any outstanding bills before year-end. If you don't have the cash, use your credit cards. The IRS allows you to take the deduction in the year of the charge; you don't have to wait until you pay the bill to take the deduction.
Other expenses that lend themselves to pre-payment are state and local taxes and professional fees. If you're paying estimated taxes, make your fourth-quarter state tax payment by December 31 rather than in January.
Rich also suggests that you donate unused business equipment to a nonprofit before the end of the year. Be sure to get a receipt and an estimate of the fair market value of the goods you donate. If you're audited, no receipt means no deduction.
Note that 2003 is the last year that a business can take an increased deduction for donating used computer equipment to a school or library. Instead of throwing the old equipment out, you can donate it and take a deduction equal to its cost basis, plus one-half of its fair market value.
If 2003 has been a good year for income at your business and your accounting is on a cash basis, you can reduce this year's taxes by delaying collecting of monies due you until after December 31. For example, you could consider giving your best clients an extra month to pay for services performed between now and the end of the year.TAKE ADVANTAGE OF THE NEW TAX LAWS
The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), signed by the president on May 28, creates some significant business tax breaks. Whether you structured your business as a corporation, partnership, S corporation or sole proprietorship, JGTRRA's incentives affect you. All of the provisions affecting businesses are effective retroactively, either to January 1, 2003, or to May 6, 2003.
“JGTRRA has opened up a number of tax savings possibilities for small service businesses,” says Cheryl Pimlott, CPA, and tax manager for Rothstein Kass. “But the biggest tax break is the Section 179 deduction, which allows you to deduct the full cost of assets in the year of purchase up to a defined limit.”
The new law increases the Section 179 deduction from $25,000 to $100,000. Purchases made right up to December 31 qualify for this huge 2003 tax break. In addition, off-the-shelf computer software is eligible for the Section 179 deduction for the first time.
“Bonus depreciation introduced in 2002 increased the maximum first year depreciation on automobiles to $10,710 from $7,660 effective May 6, 2003,” says Ginita Wall, CPA., San Diego, Calif. “Purchases up to December 31 qualify for bonus depreciation, but only if you use the car 50 percent or more for business.”
Remember that the maximum deduction is based on your percentage of business use. For example, if you use your car 80 percent of the time for business, the first-year deduction is limited to $8,568 (80 percent of $10,710).
In addition to creating opportunities to lower this year's taxes, JGTRRA makes basic changes that could also affect how you operate your business in the future for tax purposes. For example, the new law may make it worthwhile to re-examine your choice of business entity.
JGTRRA reduces individual marginal tax rates, while keeping corporate rates the same. That change will tend to make partnerships and limited liability companies more attractive. At the same time, a maximum dividend tax rate of 15 percent combined with a top corporate rate of 35 percent leaves a potential 50-percent tax on income earned at the corporate level.
If you operate your grounds maintenance business as a sole proprietorship, don't forget that this is the first year a self-employed individual can deduct 100 percent of health insurance premiums. Now is the time to make sure that you pay everything by year-end.
“While the new tax laws have incorporated many tax breaks for business,” says Wall, “they are now more complicated than ever.” She suggests that every service provider consult with his or her tax advisor to determine how to take maximum advantage of the changes.SAVE MORE FOR RETIREMENT
Make sure that you're contributing the maximum to your 401(k) or other tax-deferred retirement plan. If not, adjust your savings before year-end. If you are a sole proprietor, open a tax-deferred Simplified Employee Pension (SEP) or Keogh plan by the Dec. 31 deadline.
In recent years, the IRS has increased contribution limits and made it easier than ever to put more money away to fund your retirement years. Except for the new Roth IRA, all contributions to your retirement plan are tax deductible.
“You don't actually have to make your contributions until you file your return in April of 2004,” says Pimlott, “but you must open the account by December 31 in order to get the tax deduction for 2003.”SET UP A NEW RETIREMENT PLAN
“If you're a small employer without a retirement plan,” says Carol I. Katz, CPA, Baltimore, Md., “you might want to set one up before December 31 to take advantage of the tax credit of 50 percent of the cost of establishing and/or maintaining the plan. The credit, available for each of the first three years, is limited to $500 per year.” Use IRS Form 8881 for this purpose, but the procedure is tricky, so you will want to consult with your tax advisor before proceeding.TRIPS THAT COMBINE BUSINESS AND PLEASURE
Did you make any trips that combined business and pleasure this year? If more than half of your time was devoted to business, you can deduct transportation costs as well as all directly business-related expenses. If more than 50 percent of your time was spent on pleasure, the cost of transportation will be disallowed.
Of course, if the trip was entirely for business purposes, such as attendance at a business seminar (related to your grounds maintenance operation), trade association convention, or trade show, all expenses associated with the trip may be chalked up to business expense.
“Many business travelers don't keep adequate documentation for travel expenses,” says Rich. “As a result, they risk losing out on deductions.” Documentation for travel and entertainment should include the business purpose and such details as where, when, who you were with and a receipt for any expense over $25.USE OF YOUR PERSONAL CAR FOR BUSINESS
Even if you used your personal car for business only on occasion, you may deduct the costs of maintenance and operation for the business-use portion.
In figuring your auto expense deduction, you may use either actual expenses or the standard mileage rate. Many tax advisers suggest that you or your accountant figure out your auto deduction both ways and use the method that gives you the biggest deduction.
When you use actual expenses, you deduct the business portion of car expenses including depreciation, gas and oil, insurance, licenses, parking fees, registration fees, repairs, tires, tolls and even garage rent.
Under the standard mileage rate for 2003, you may deduct a flat 36 cents per business mile (down from 36.5 cents per mile in 2002).PURCHASES FINANCED BY BUSINESS LOANS OR CREDIT CARDS
If you bought any business equipment or supplies on your credit card or with a business loan, you may deduct those purchases this year even if you won't pay off the loans until later. While you're at it, don't forget to deduct any interest costs on the loans themselves.BALANCE OUT INVESTMENT GAINS AND LOSSES
This has been a volatile year for investments. Some did poorly while others rebounded nicely. By selling appreciated assets and liquidating under-performing investments, you may match gains and losses to minimize your personal income taxes.
If you have sufficient losses to offset your gains, you may deduct the losses this year on sales completed by December 31. Note, however, that tax rules limit the amount of capital losses that you can use to offset ordinary income to $3,000.
If your net loss totals more than $3,000, don't worry. You can carry forward the losses over $3,000 every year until you use them up.
Before the end of the year, make charitable contributions that you would normally make early in 2004. That way, the charity gets the money early and you get a deduction on your personal taxes.
Of course, you can't rearrange your business affairs to accommodate every twist and turn of the tax laws. Still, whittling down your payment to Uncle Sam every year is worth the effort. If you can cut just $1,000 off your tax bill each year and invest that money in your tax-deferred retirement account, after 20 years you'll have added an extra $60,000 to your nest egg. After 30 years, it will be more like $160,000 — all at Uncle Sam's expense.
William J. Lynott is a member of the American Society of Business Publication Editors and a former management consultant and corporate executive who writes on human interest, business and financial topics. His latest book, Money: How to Make the Most of What You've Got, is available through bookstores. You can reach Bill at firstname.lastname@example.org or through his Web site: www.blynott.com.