Even if you’ve been procrastinating with your tax planning or you’ve just started a business, you still have a little time left to lock in some tax savings before the year officially comes to an end. Here are five end of the year tax moves you can do today in your business that can save hundreds or even thousands of tax dollars.
1. Make capital purchases that are eligible for the Section 179 Deduction. In an nutshell, the Section 179 tax deduction allows you to write off the entire cost of your capital equipment purchases (this includes assets such as furniture, equipment, vehicles, and even certain types of software) on your tax return in the year of purchase. Currently, the maximum Section 179 deduction is $139,000 for eligible assets placed in service in 2012, and the threshold of qualified assets that can be purchased is now $560,000 (past this limit, the deduction starts decreasing).
As it stands now, beginning in 2013, the total Section 179 Deduction will be reduced to $25,000, and the phase-out threshold will be just $200,000. So if you know that you will need certain assets in the near future (even if you don’t need them right now) you may want to buy them now before the year ends. Certain financing arrangements may qualify so you don’t have to cover the entire cost of the item up front, and because you are making the purchase at the end of the year, you may be able to capitalize on some year end close-out sales. Just be sure to consult with your tax adviser because there are plenty of rules and limitations surrounding this deduction.
2. Increase your charitable contributions. Charitable contributions are tax deductible, so depending on your setup you could give personally or send charitable gifts from business funds. Just make sure you get and properly store your acknowledgment letters, since the IRS has been auditing and disallowing contributions without that backup document.
3. Contribute to your retirement plan. Contributions made to retirement plans reduce your taxable income. For example, in 2012 self-employed individuals can contribute $17,000 as a 401(k) deferral, plus 25% of net income. Just make sure you are clear about any limits or deadlines associated with your particular retirement plan.
4. Increase employee benefits and gestures of appreciation. Here is an idea that will not only lighten your tax load but will also create goodwill among your employees as long as your heart is in the right place. Employee benefits and certain social or recreational events are tax deductible. If you give your employees a discount on the cost of your goods or services, or if you provide paid holidays or vacations, then you have provided a deductible benefit. Moreover, if you haven’t yet made a holiday party for your employees. You may want to reconsider. According to the IRS, you can deduct the full cost of providing an occasional social or recreational event for your employees, such as a company picnic or holiday party.
Your customers count as well. Entertainment and gifts for clients are 50% deductible. But, of course, there are rules. So make sure you take a look at IRS Publication 463 and consult with a tax professional to ensure that you are in compliance.
5. Start up your business. Did you know that you can write off the expenses you incur in the start-up phase of your business? Eligible expenses include research and development, consulting with professionals, and training employees. But, this deduction only goes into effect once the business is operational, so you need to have an operating business by December 31st. According to the IRS, an operating business as one that has opened its doors or is accepting transactions.
You can deduct $5,000 of business start-up expenses. If your total exceeds that, you may amortize the remainder over 18 months. There are special rules and limitations over here, so make sure to discuss all this with a tax professional.
Aside from the five strategies mentioned make sure you are clear about which expenses can be deducted. Here are a few resources to learn about available deductions for small and home-based business owners:
- Check out my previous post on Free Online Tax Resources for Small Business Owners and the Self-Employed
- Deducting Business Expenses- a guide from the IRS
- Home Office Deduction- a guide from the IRS
- IRS Frequently Asked Questions