TIP: A New Spin on Year-End Tax Strategies

Tip of the Month

December, 2008

TIP: A New Spin on Year-End Tax Strategies

A new president in the White House in January will mean changes are coming and that it’s time to sit down now with your professional tax advisor to talk about your 2008 returns. There are several issues that small business owners might want to factor into their year-end tax planning. Here are a few to consider:

If revenues are down for this year, following the conventional wisdom of accelerating deductions and deferring income to next year’s tax bill could prove to be a mistake—if tax rates change under the new administration.

We don’t know how or when the new President’s tax changes will take place. If your business has remained steady, but receivables are mounting up because clients are slow to pay, you may be facing a lot of late payments or bad debt in 2009. With this in mind, it may not be prudent to look for additional opportunities to defer income onto 2009 balance sheets. Of course, this depends upon each business owner’s specific situation, and a visit to your tax professional will help determine your best approach.

Optimize all opportunities to leverage equipment depreciations this year. We don’t know how much longer some of the recent deductions allowed for business machinery, including vehicles and computers, will be in play. If your planned purchases qualify as “business assets”, the Internal Revenue Service (IRS) allows a 50 percent deduction in addition to the usual depreciation and deductions available under Section 179. This same tax code permits a business to write off the full cost of certain business assets up to $250,000, but to qualify for this, your new asset purchases must be made this year, and be in use in 2008.

Likewise, don’t overlook vehicle and driving expenses. If you are a sole proprietor and file a Schedule C, you can deduct 50.5 cents per mile for the first half of 2008 and 58.5 cents for the latter half for any driving you did in your personal vehicle that relates to your business. Other business owners (and sole proprietors who prefer the option of actual cost over the deduction per mile) can determine what percentage of their annual mileage was business versus personal, and deduct vehicle expenses - including maintenance - based on the business-related percentage.

Determine employee bonuses before year-end but deliver them in 2009. If your business runs on an accrual basis, you may be able to report the payments at year-end to allow them to appear as deductions on your company’s 2008 filing. Bear in mind, if you do this, that your employees will be taxed on their bonuses in 2009.

The tax picture is unclear for 2009. Many issues will not be resolved until the new administration takes office and the nation’s economic outlook becomes clearer. This uncertainty means it is even more important than ever to leverage the tax benefits that are there for the taking in 2008’s returns. More than ever, time spent planning a strategy with a professional tax advisor now could prove extremely valuable in the coming year.

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.