Now that we are in the final quarter of the year, it is a good time to commence year-end tax planning for 2009. The steps you take now will pay off in tax savings when you file your return in 2010.
Step 1: Schedule an appointment with your tax advisor.
If you have an accountant, plan to meet soon so he or she can review your financial picture for the year to date and recommend moves to be made before December 31. If you don’t have an accountant, consider finding one to use. The fees you’ll pay may be less than the taxes and other expenses you’ll save from this professional advice.
Step 2: Review your tax and financial statements for the year.
Many small business owners simply go along—collecting revenue and paying expenses—without looking at the overall picture of their activities. Instead, be proactive and get a firm understanding of your company’s financial picture to enable you to make smart tax decisions.
If you use QuickBooks or other accounting packages, you can easily generate a balance sheet, profit and loss statement, and cash flow statement from the information you’ve imputed into your system. Use this information to project whether you’ll show a profit or a loss for the year—information that will dictate year-end tax moves.
Step 3: Learn what new tax rules may benefit you.
The American Recovery and Reinvestment Act of 2009 (http://www.irs.gov/newsroom/article/0,,id=204335,00.html?portlet=6), as well as other legislation, present tax-saving opportunities for your business. If you wait until meeting with an accountant until 2010 to learn what’s new, you may lose out on incentives you could have used if you’d acted before the end of 2009.
For example, if you need to purchase equipment or machinery for your business, you may qualify for an immediate deduction, called first-year expensing (also called the Sec. 179 deduction) of up to $250,000 as long as the property is put into use in your company by December 31. First-year expensing is a write off that eliminates the need to depreciate the cost of a number of years. You may also qualify for 50% bonus depreciation, an accelerated depreciation rule that is set to expire at the end of 2009.
Step 4: Take action now.
Strategic moves can save you tax dollars when you file next year. Here are just a few key steps to make before year-end:
- Set up a qualified retirement plan for your business, such as a 401(k) plan.
You can do this even if you are the only person in your company. Tax-deductible contributions for 2009 can be made up to the extended due date of your return, but the paperwork must be signed by December 31, 2009.
- Review inventory on hand.
If you have slow-moving, obsolete, or damaged items and offer them for sale now, you’ll be able to take a write-down and save on taxes.
- Decide what expenses to continue beyond 2009.
Review subscriptions, memberships, and insurance up for renewals now to see where cuts can be made if you need to save money. In making multi-year renewals, businesses on the cash method of accounting (the method used by most service-based firms) should keep in mind the “12-month” rule. Payments for benefits extending beyond 12 months are deductible ratably over the period to which they relate, so for example, a three-year subscription paid now won’t give you the full deduction in 2009.
- Collect on aging receivables.
Unlike fine wine, receivables don’t get better with age. The sooner you can collect, the more you stand to receive. If you are a service business reporting the cash basis and can’t collect, you won’t be able to claim any tax deduction for the loss. If you’re on the accrual basis, you can only deduct outstanding receivables when they become uncollectible. Consider working with a collection agency or attorney to recoup at least partial payment on outstanding receivables and nail down any tax write-off (if applicable) for the year.