Tax Planning Strategies
This entry was posted on 11/13/2007 7:25 PM and is filed under Tax.
Question: I started my business in April of this year and I intend to have my taxes prepared by an accountant sometime after the end of this year. I was told that I should have some tax planning strategies done before the end of this year so that I may reduce my income tax burden. How can I do this if I do not know what profit I will have until after I close my books at the end of the year?
Answer: The Staten Island Chapter of the CPA Society is planning two free seminars in early December of this year, open to the public, covering this very subject. At the end of this article look for the locations and time they will be held. This should prove to be of great value to both Individual and Business taxpayers.
You should understand that too many taxpayers and business owners overlook the opportunity to take certain steps before year-end, which can have a major impact on your final tax liability. Tax planning is concerned with the timing and method of reporting income and deductions. The basic philosophy is to defer the payment of tax by accelerating deductions and postponing recognition of income items that typically accomplish this. This article can only cover a few of these strategies so make sure to consult with your tax professional regarding all the tax saving opportunities available to you.
It should not be difficult for your accountant before the end of the year to project your potential tax liability. With that information available here are some of the tactics that may be taken to legally reduce your tax burden.
For cash-basis method businesses, you could send out invoices late in December so that collections will not be made until January.
Upgrade your equipment -- from office computers and phone systems to furniture and machinery -- and write off the cost this year. If profitable, you can opt to expense up to $125,000 of equipment placed in service by the end of the year, instead of depreciating the cost over several years. The deduction is allowed whether you pay cash or finance the purchase. This amount is $160,000 for qualified enterprise zone and qualified community property.
Purchase supplies that you'll use in the coming year to deduct their cost now. You'll also save on money through better buying (e.g., bulk purchases).
You can establish a retirement plan before the end of the year. The deduction is allowed on the current-year return even if funded just before you file the return next year. Only a SEP plan can be established and funded after the end of the year and can be funded all the way to the last extension date in October.
Establish a medical insurance plan or convert to or establish a high-deductible health plan.
Employ your minor children (under 18) to perform administrative tasks and avoid Social Security taxes on the wages – this shifts income to a lower bracket. (The children may establish Roth IRAs to gain significant benefits for the future.) This is only available to sole proprietorships as well as husband and wife partnerships. Federal Unemployment tax is also avoided but not workmen’s compensation insurance.
Once considered a tax on the wealthy, by virtue of its construction, the AMT (Alternative Minimum Tax) is catching more and more individuals. Those who happen to have significant deductions – those living in a state with a relatively high personal income tax rate and high real estate taxes – are vulnerable. The AMT makes year-end planning essential.
You should consider the status of any final estimated tax payment requirements. A penalty for underpayment of taxes can be costly.
These are just a few of many strategies that will be covered at the forthcoming free seminars being sponsored by the Staten Island Chapter of the CPA Society.
Saturday - December 1st – 10 am to Noon – St. George Library – 5 Central Avenue – Staten Island, NY – Guest Speaker Doreen Inserra CPA
For Reservations call 718-979-5163 or the Library at 718-442-8560
Saturday – December 8th – 10 am to Noon – Historic Richmond Town Court House – 441 Clarke Avenue – Staten Island, NY – Guest Speaker John J. Vento, CPA, MBA CFP®
For Reservations call 718-980-9000 or SCORE at 718-727-1221
