Although there are just a few days left in 2009, small-business owners still have time to squeeze in a few tax breaks.
Making a last-minute equipment purchase or paying your estimated state taxes early can shave some money off your bill. A retirement plan contribution can also help.
But before you start spending to beat the Dec. 31 deadline, remember the mantra of accountants and other tax professionals: Don't take these steps just to save on your tax bill. They have to make good business sense overall.
You also shouldn't be thinking about 2009 alone. Tax planning needs to be a forward- and backward-looking process. You need to consider if you're going to be making more money next year. Or, if you're likely to suffer a loss for this year, should you be carrying losses back to 2008 or even 2007?
Gordon Spoor, a certified public accountant in St. Petersburg, Fla., said income, deductions and tax years "all have to be looked at together. None can be looked at in isolation."
Accelerate deductions — maybe
To increase their deductions, many owners might want to consider buying, for example, computers or vehicles before Dec. 31. That will allow them to take advantage of the Section 179 deduction for new equipment purchases.
But you need to keep an eye on the improving economy.
"If you think you're going to be in a higher tax bracket next year, maybe you want to save those deductions," said Gregg Wind, a CPA with Wind Bremer Hockenberg in Los Angeles.
Spoor said owners should have a good sense of whether their companies are likely to show a profit for 2009 before taking any more deductions. He warned that taking too many deductions could have unintended consequences. If they end up with a loss, they might not be able to benefit from other deductions such as the one for health insurance for the self-employed.
"Do not back yourself into a corner, "Spoor said.
Of course, if your PC is on its last legs, then it's a sound business decision to replace it now.
Owners need to be aware of some caveats with the Section 179 deduction, named for an Internal Revenue Code provision and which allows for equipment to be deducted up-front rather than depreciated over time.
Equipment must be delivered and placed in service by Dec. 31, so big, custom-built equipment such as manufacturing machinery is unlikely to be eligible. And heating and air conditioning systems, which are considered parts of a structure, are not covered under this section, although they can be deducted
through depreciation rules.
You don't have to pay for the equipment this year. As long as it's up and running by Dec. 31, you can deduct it.
If you can make a retirement plan contribution by the end of the year, you probably should do so. Most tax professionals and financial advisers will recommend that small-business owners fund their plans not just for the deduction, but because it's always better to start saving now rather than later. While no one can predict the course of the stock market and interest rates are still very low, the pros believe investing now is always the best course.
Owners who have the retirement plans known as SEPs, short for Simplified Employee Pension, or SIMPLEs, short for Savings Incentive Match Plan for Employees, have more leeway to make their 2009 contributions. They don't have to place money in employees' accounts until the due date of their returns, including extensions. That could be as late as next Oct. 15.
Should you pay your state tax now?
Paying your estimated state taxes by Dec. 31 instead of the Jan. 15 deadline will allow you to deduct them on your 2009 federal tax return. But, like any other deductions, you need to think carefully before you write the check.
Wind noted that owners in states with high income taxes could end up paying more tax by accelerating this deduction. They could find themselves subject to the Alternative Minimum Tax, which targets taxpayers with very high deductions.
It may make sense to save that deduction for next year.
Make your inventory pay off
Wind noted that companies with excess inventory still have a chance to lower their taxes by doing one of two things: giving it to a charitable organization or writing it off.
"If your inventory hasn't moved for a while, think of donating it," Wind said, noting that companies should deduct the cost-basis of the inventory. Anything that can be used by a school or group considered a qualified charitable organization by the IRS can be deducted.
"If it's worthless inventory, or stale, just write it off," Wind said.
Might be time for a trip through your warehouse in the last days of the year — it may help you get some tax savings.