Yearend Tax Planning
As the end of the year draws near, small business owners need to review their tax-planning strategies. It is important to understand what tax planning strategies you can still take advantage of, both personally and on the business side, before the end of the calendar year.
Given that so many small businesses are organized as “flow-through” entities such as S-corps and LLCs, it is wise to have the same person do your personal and business tax preparation. In my experience, when taxpayers do not have the same person handling their business and personal returns, opportunities are missed.
Some key areas that small business owners should consider are:
1) On the personal side, charitable donations and Roth IRA conversions should be considered before the end of the year. I also recommend speaking with your tax advisor to ensure that you are not going to be in a position to attract unwanted IRS scrutiny on your personal or business returns.
2) On the business side, bills passed in 2010 increased the ability for small business owners to deduct new and used equipment purchases under Internal Revenue Code Section 179. Small companies are allowed to deduct the full amount of the purchases upfront, rather than depreciate the cost of such items over many years. The deductions apply to tangible equipment and personal property purchased and put into service in 2011, including computers, software, furniture and telephone systems – to name a few. Leased equipment may also qualify.
For tax year 2011, the amount of equipment that can be deducted is $500,000 and the total amount of equipment that can be purchased is $2 million. The deduction begins to phase out after the $2 million threshold because this incentive is targeted specifically at small and midsized companies.
In 2012, the deduction is scheduled to drop to $125,000. In 2013, it’s expected to go back $25,000, unless Congress takes action to raise it again.
3) For those companies that reach their $500,000 limit under Section 179, they may be able to take advantage of “bonus” depreciation. Bonus depreciation allows for 100% depreciation and applies only to new equipment – unlike Section 179.
Be sure to keep receipts for purchases, leases, and installations to document that your equipment was paid for and put into service in 2011.
4) If necessary, you may also consider accelerating deductions and deferring income into next year, but don’t use these strategies if they don’t make sense. Often I see companies employ these strategies unnecessarily and potentially to the detriment of their business.
For a consultation regarding your yearend tax planning contact Hone Maxwell LLP today.