Tax Tips
Year-End Tax Planning for Small Businesses- December 2000
Richard Scrivanich - Partner
Fall is a busy season for many of us; whether it is raking leaves or preparing for the holidays, the last few months of the year are not when most people want to stop and think about doing some tax planning for their business. But just as cleaning up the garden in the fall pays off in the spring, some tax planning now can really make a difference in your business's tax bill.
Business property expensing deduction.
The cost of new equipment and machinery that a business places in service is generally depreciated over a period of years. As an alternative to depreciating business property, small businesses, under Section 179 of the Tax Code, may elect to expense up to $20,000 of the cost of qualifying property placed in service by the end of 2000. The immediate expensing deduction is limited to personal property - such as office equipment - that is used in the taxpayer's business. Be aware that the expensing deduction begins to be reduced dollar-for-dollar to the extent that total qualifying business property purchases exceed $200,000 for the year.
Retirement plan contributions.
Retirement plans are one of the most valuable tax breaks available to small business owners. As a business owner, you can personally deduct contributions to your own qualified plan, and your company can deduct contributions made on behalf of its employees. The government has a number of retirement plan alternatives in place for small business owners. SEPs, Keoghs, and SIMPLE plans all offer significant tax advantages. With a SEP (Simplified Employee Pension), you can have a written plan that allows you to make deductible contributions towards your own and your employee's retirement without getting into more complex retirement plans.
- A SIMPLE retirement plan (Savings Incentive Match Plan for Employees) is a written salary arrangement that allows a small business (fewer than 100 employees) to make elective contributions to a retirement account on behalf of each eligible employee.
- Keoghs are available to individuals with any amount of self-employment income. Keoghs must be opened by December 31, 2000, for your contributions to be deductible for this year, but you can make a deductible contribution up until the due date of your tax return, including extensions.
Putting business property into service.
There are substantial tax advantages associated with buying business property during the last half of the year. Tax law generally allows you to claim six months' worth of depreciation in the year you put the property into service, regardless of how late in the year you make the purchase. However, if you place too much equipment in service at year-end, you may trigger a special tax rule. Specifically, if the cost of business assets placed in service during the last quarter of 2000 exceeds 40% of the cost of all business assets put in service during the year, your depreciation deductions for all assets placed in service during the year are figured under the mid-quarter convention, significantly reducing your annual depreciation deduction.
Expenses of going into business.
The cost of investigating the potential of a new business and getting that business started are considered capital expenses, which can be recovered by depreciation or amortization. Under the tax law, you may elect to depreciate or amortize your start-up costs over a period of 60 months or more if two conditions are met: (1) the costs are ones that would be deductible if they were paid or incurred to operate an existing business, and (2) the costs were paid or incurred before you actually began business operations. In the event you decide not to go into business, any costs you paid to investigate the possibility of going into business are considered personal costs and are not deductible. Costs you paid in your attempt to actually start or purchase a specific business can be claimed as a capital loss.
Casualty Losses.
Business owners who suffer damage or loss to business property as a result of a natural disaster are eligible for tax breaks to offset those losses. Special rules apply if the losses occur in a location declared a federal disaster area by the President of the United States. In such cases, a business owner can treat the casualty loss as if it occurred in the year immediately preceding the tax year in which the disaster actually occurred. By doing so, you can speed up your refund.
Medical Savings Accounts.
Medical Savings Accounts (MSAs) are designed to work in conjunction with high-deductible health insurance plans. They are available to self-employed individuals and owners and employees of small businesses. MSAs are similar to IRAs in the sense that employers and employees can make tax-free contributions to the MSA. Instead of withdrawing the funds at retirement, the taxpayer withdraws the funds to pay for qualified medical expenses. Assets not spent on medical expenses accumulate from year-to-year and can remain invested on a tax-deferred basis to fund future medical expenses or to supplement the taxpayer's retirement savings.
These are just a few of the strategies you may want to consider in managing your business's tax bill. If you have any questions about how to control your business's tax bill, or any other question for that matter, please feel free to give me a call at (562) 698-9891.
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