Although tax season is still a few weeks away, now is the time to take advantage of a basket of tax opportunities that can help your small business reduce its tax liability and save money come April 2012.
Read on for seven tips that can help you maximize your deductions and claim the credits you deserve.
Spend Some Money Before Deduction Limits are Cut – This is definitely the year to take advantage of the Section 179 deduction, which allows businesses to deduct expenses for a variety of capital equipment purchases including computers, furniture, certain business software, vehicles, manufacturing equipment, and more. Thanks to both the 2010 Tax Relief Act and the Small Business Jobs Act, deduction limits under Section 179 have increased to $500,000 as long as you spend less than $2 million in new purchases.
This means that if your small business makes any purchase before the end of the year, you may be able to deduct most of your outlays for capital equipment. Even if you don’t think you need to make new purchases, review your inventory and equipment and use this time to replace obsolete or aging assets.
If possible, take advantage of this temporary opportunity before the end of the year. Next year, the deductible limit drops to $139,000 on purchases only up to $560,000, unless there is an extension from Congress. Be sure to talk to your tax advisor or accountant for more specifics on qualifying purchases and read more about the ins and outs of business expenses and tax deductions from SBA.
Hire a Returning or Disabled Veteran – In November, the President signed into law specific tax credits for businesses that hire unemployed veterans. The Returning Heroes Tax Credit provides businesses that hire unemployed veterans with a maximum credit of $5,600 per veteran, and the Wounded Warriors Tax Credit offers businesses that hire veterans with service-connected disabilities with a maximum credit of $9,600 per veteran. Read more in this White House fact sheet: Returning Heroes and Wounded Warrior Tax Credits.
Defer your Income – If you think you will be in the same or lower tax bracket next year, deferring income might make sense for you (more income next year could push you into a higher tax bracket and a bigger tax bill).Billing late in December will defer your taxable income for 2011 (since it’s unlikely you’ll get paid until 2012.) You can also defer income by taking capital gains in 2012 instead of in 2011.
While you can’t defer income or wages for your employees, you might consider delaying the payment of bonuses until the new year. Note that if you operate on an accrual accounting basis, you can claim a deduction for the bonuses this year even though the bonuses aren’t paid until next year. However, the bonuses must be paid within 2.5 months of year-end.
Take Advantage of the R&D Tax Credit (It’s Not Just for High Growth Startups) – Another tax saving that’s up for expiration unless Congress extends it in 2012 are certain credits for research and development. This one doesn’t apply only to high tech or bio tech, but extends to certain companies that employ engineers, outsource product testing, or are seeking to diversify a product line. This article from Bloomberg Businessweek explains more about how small businesses can benefit from and claim the credits. Again, talk to your tax advisor to see if you qualify.
Set Up a Retirement Plan or Fully Fund One Before Year-End – If you are self-employed, now is the time to set up a retirement plan or add pre-tax money to your existing plan to reduce this year’s income. If you still can, max out your pre-tax contributions to your traditional IRA, 401k, or 403b, and get a tax deduction to lower your taxable income. This year, sole proprietors can put $16,500 (pre-tax) into a solo 401(k), ($22,000 if you are 50 or over). Check with your plan administrator for limits and deadlines for different types of plans.
Contribute to Charity– With the holiday season upon us, now is the time to consider making a business charitable contribution. You can donate money and/or usable items such as clothing, toys, and other goods, and claim a deduction for the fair market value. Be sure to get proper documentation or a receipt for your records.
Keep your Records Straight – Keeping your books in order throughout the year is critical. Use the time now to make sure everything is up-to-date and accurate so that you maximize your deductions and save your accountant time and billable hours when tax season rolls around. Read these tips from the SBA about Managing Your Small Business Tax Obligations.
SBA Guide to Small Business Taxes
SBA Fact Sheet – Tax Breaks for Small Businesses
Reporting Business Income and Expenses: Which Accounting Method is Right for You?
How to Choose the Right Tax Year for Your Small Business
Taking Stock of the Business Year - How to Conduct a Year-End Review & Plan for the Year Ahead
Electronic Solutions for Your Business Taxes