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Year-End Tax-Planning Moves for Business Owners

The end of the year is usually a hectic time for business owners. This December is particularly challenging because of continuing tax uncertainty. However, there are still several things you can do before the end of the year to claim deductions or take advantage of tax rules that are ending this year.

Barbara Weltman recommends the following five steps in her article for the Wall Street Journal:

  1. Bring your books up-to-date. Before any tax planning can be done, it's vital to know whether your company made or lost money for the year.
  2. Consider a retirement plan. Profits can be sheltered in qualified retirement plans.
  3. Don't forget health coverage. If you are self-employed, you can use the premiums to offset the amount of net earnings used to calculate self-employment taxes.
  4. Donate to charity. The donations are tax-deductible within the limits allowed by law.
  5. Upgrade equipment. Whether your business is profitable or not, there is a tax break to help.
    • If the business is profitable, elect first-year expensing for the cost of equipment up to $500,000. (This dollar limit is up from $250,000 in 2009). If the cost is more than the dollar limit, you can also use 50% bonus depreciation and a regular depreciation allowance to effectively write off most of the cost of the purchase. The bonus depreciation option is set to expire on Dec. 31. We have blogged about this tax break before here.
    • If the business is not profitable, rely on 50% bonus depreciation to write off half the cost (plus a regular depreciation allowance on the other half). This write-off can create or increase a net operating loss, which can result in a carryback that can generate a cash refund.

In an article on the OPEN Forum, Scott Allen presents these additional ideas:

  1. Deduct charged expenses. Both cash and accrual basis taxpayers can charge expenses on a credit card and deduct them in the year charged, regardless of when paid.
  2. Maximize auto depreciation for 2010 purchases. If you buy a new car and place it in service before the end of 2010, your first year depreciation deduction will be $11,060. If you wait until 2011, your first year depreciation deduction may be only $3,060.
  3. Liquidate any investments now rather than later. The Capital Gains rate increases to 25 percent from 15 percent as of January 1, 2011 (assuming the Bush Tax Cuts are allowed to expire). Along with this change, the reduced tax rate treatment for some dividends also increases in a like manner.
  4. Are you expecting 2011 to be significantly better than 2010? You might consider claiming some business deductions in 2011 instead of 2010. 2011 is likely to see a tax increase, particularly for high-income taxpayers. Therefore, it's possible that a deduction claimed in 2011 will be more beneficial (save more tax) than the same deduction claimed in 2010.

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