Year-end tax strategies for small business owners
It is necessary to keep constant watch on the business transactions during the year from tax angle. However there are some specific tax-saving strategies which can be applied at the end of the year. They can be very useful for reducing your tax liability.
Here are some of the very popular tax-reducing strategies which can be used at the end of the year:
1. Contributing to a retirement plan – you can contribute a good amount to your retirement account and bring down your tax liability. If you don’t have such an account, it is a good time to set up one. The contribution to such plan reduces your income and consequently reduces your taxes. There are some retirement plans having contributions deadline beyond the end of the year. For instance in case of a solo 401(k) plan, you cannot contribute after the end of the year. So it’s not advisable to wait.
There is one excellent plan called the simplified employee pension plan (SEP-IRA), which is very suitable to self employed people and owners of small business. You can contribute (and deduct) ,000 for the year 2008 under this plan.
2. Take the benefit of section 179 deduction – if you have purchased any equipment up to 5,000 worth, you can straightaway claim a deduction for the entire amount for the current year. There is no need to keep on depreciating it over a number of years. The only condition for such a deduction is – the equipment must be installed and it must be running before the close of the year. And there is one more important tip – this deduction is not limited to equipment but also extends to a software package.
The limit under this deduction is not carried forward to the next year. It goes off at the end of the year. So if you do not use it, you will be losing it. So you can make purchases of necessary equipment and software for your business at the end of the year and claim the entire amount as a deduction.
Remember, this deduction cannot exceed your taxable income. Also you cannot claim deduction under this section if your purchase is more than 0,000 worth of the qualifying assets. These warnings are essential because you may end up purchasing some equipment and later find out that the deduction is not available!
3. Managing your revenues – just deposit less money in your business account at the end of the year, or else you can Invoice less for your clients in December (you can always invoice them in January!) In this strategy you need to be very particular about your customers. If you’re likely to lose money due to late invoicing, then it is advisable to invoice those customers as soon as possible. Remember, you cannot manage revenues by not depositing a check already received. For a valid check received by you before the end of the year is considered your income for that year even though you have not cashed the check or not deposited the check in your account. So never sit on a check to manage your revenues.
4. Increase your business expenses – one of the important tax strategies employed by small business people is to prepay the expenses. You may prepay the rent.
Remember, pre-paying the expenses for the next year will have impact on the tax position of the next year. The profits for the next year will be increased due to proportionately less expenses charged! So you need to keep in mind this aspect while pre-paying the expenses.
And another important point, as you want to pre-pay the expenses, you customers may also think similarly. And you need to look after your cash flow situation also.
While making all these adjustments, you need to keep an eye on AMT. By increasing your income and ignoring AMT aspect, you may land up in trouble.
This is a good time to evaluate the services of your tax consultant. If your consultant is filling your forms routinely without putting his mind on your details, it is right time to get rid of him.
Chintamani Abhyankar, is a well known expert in the field of finance and taxation for last 25 years. He has written many books explaining inside secrets of the magic world of personal finance. His famous eBook Stop donating your money to IRS which is now running in its second edition, provides intricate knowledge and valuable tips on personal finance and income tax.
Article from articlesbase.com
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How Business Owners Plan For Retirement
Saving for retirement is even more important for solo-entrepreneurs because you don’t have a company sponsored pension plan or matching 401K contributions to rely on. There are many retirement plans available to self employed individuals and small businesses. Which one is right for you?
Here is just a sample of the retirement plans available to solo-preneurs and small businesses:
Roth IRA – although this is not just for solo-preneurs, this is the first place you should look to save if you are just starting to save for retirement (or resuming to save after starting a business). Roth IRAs are low-cost, very flexible, and allow you to grow money tax-free as long as you follow the distribution rules. Contributions can be made up to ,000, and can be withdrawn at any time without tax or penalty (earnings withdrawn may be subject to penalty and tax if withdrawn before age 59 1/2 and certain other conditions are not met).
SEP IRA – if you’re maxing out your Roth IRA, and are ready to save more, a SEP IRA allows you to save up to 25% of your compensation (20% of your self-employment income) for a maximum of ,000 per year. Contributions are tax-deductible, and SEP IRAs have low maintenance fees. Contributions can be made for employees also, but employees cannot contribute to their own SEP IRA. This is a good choice if you just have a handful of employees and are looking for a low-cost way to save for your own and your employees’ retirement.
Simple IRA – a Simple plan offers many of the benefits of a 401K, but with less IRS reporting requirements. You can contribute up to ,000 to a Simple IRA, with an employer match of up to 3%. Contributions are tax-deductible, and Simple IRAs also enjoy low annual fees. Employees are allowed to contribute to Simple plans, and a company match is mandatory. If you have a lower salary (or self-employment income) in your small business, a Simple IRA allows you to put more away towards your retirement than other plans.
Solo 401K – for small businesses with no employees, the solo-401K allows you to put the maximum amount away, with less cost and less reporting requirements than a traditional 401K. Similar to a SEP IRA, contributions max out at ,000. However, unlike a SEP IRA, participants in a Solo-401K can contribute up to 100% of the first ,000 of compensation or self-employment income, and an additional amount up to 25% of your compensation. This is important because it allows you to save substantially more than a SEP IRA, if your compensation is less than 0,000 per year. A solo-401K is not appropriate for small business with employees or expecting to add employees.
There’s no one best plan for all small businesses. The best plan for you will depend on many factors, such as whether you have employees or not, how much you want to contribute each year, how much time you want to spend administering the plan, etc. To get more information about small business retirement plans, contact a no-load mutual fund company, a discount brokerage company or a fee-only financial planner.
Article from articlesbase.com
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