Year-End Tax Planning - Stock Up
In yesterday's post, I discussed the issue of timing to save on taxes. Figure out which year (this year or next year) will have the highest taxes. Then move income into the year of lower taxes and expenses into the year with higher taxes. The second step in this timing process is to look for other ways to increase expenses by stocking up and pre-paying (if you want to move expenses into this year, that is).
Stock Up
- Look at your office supplies and copy paper and replenish to a reasonable amount.
- If you have supplies you use regularly in your factory, warehouse, or in your work, stock up on these too.
Pre-Pay
- Pre-pay insurances, like your business insurance or specialized insurance for your type of business (malpractice insurance or product liability insurance, for example)
- Pre-pay your rent or your mortgage. If you pre-pay the mortgage, make sure you are drawing down the principal, not just paying additional interest.
- Pre-pay on subscriptions for professional journals or the reception area in your office.
Check with your tax adviser, to be sure the savings will reduce your income.
For More Information
More on Year-End Tax Planning
Timing is Everything in Year-End Tax Planning
"Timing has a lot to do with the outcome of a rain dance." (Old Cowboy quote)
This week, I am focusing on year-end tax planning to save you money on your 2009 business taxes. In these tough times, we all need as many tax saving ideas as we can get. Today, I am focusing on timing of income and expenses to get you the lowest taxes possible.
Accounting Method and Timing
Timing of income and expenses is directly related to your accounting method: cash vs. accrual, and year-end income and expenses.
- In cash accounting, you recognize income and expenses when the money is received (income) or paid (expenses). If you bill a customer in December and you don't receive the money until January, you don't have to count the income as being received in December. Expenses work the same way.
- In accrual accounting, you recognize the transaction when it is established. So, in the example above, under accrual accounting you would have to record the income when you sent the bill, and the expense when you received the bill, even if no money changes hands.
Timing Principles
Timing of income and expenses is related to two principles:
1. Which year will have the highest taxes (this year or next year)
2. Which accounting method your business uses
If you know that 2009 will probably have higher taxes than 2010, you would want to reduce your taxes by:
- Moving income into the lower tax year (2009), if possible, and
- Moving expenses into the higher tax year (2010).
You can see that the timing of income and expenses then depends on the accounting method. To move expenses into 2009, for example, in the cash method you need to pay them in 2009; in accrual accounting, you can get vendors to bill you in 2009; even if you don't pay the bill, the expense is counted in 2009.
Remembering these principles can help you make decisions on income and expenses between now and the end of this year.
For More Information:
Cash vs. Accrual Accounting
Timing Income and Expenses to Lower Taxes
Are You Paying Employee Bonuses This Year?
Many companies are not paying employee bonuses in this tough year. A recent article in the Atlanta Journal Constitution reports the results of a survey showing that only 31 percent of small businesses are planning to give bonuses, down from 44 percent last year.
Take a minute, please and vote in my "bonus" poll:
If you had a good year and you figure giving bonuses is a good way to reward employees and reduce your taxes, now is the time to make that decision. Some tax considerations for bonuses you might want to know about:
- Accounting method: Cash vs. Accrual. If your business is run on the cash accounting method, you must pay out the bonuses by the end of the year to get the tax benefit. But if you use accrual accounting, you can record the bonus in 2009 and then you can take up to March 15, 2010, to pay those bonuses, if your business has a December 31 year-end.
- S Corporations. Bonuses for shareholders and owners can be deducted, as long as they own their shares at the time the bonus is paid.
- C Corporations. Bonuses can only be deducted for shareholders/owners who have a 50 percent or higher ownership at the time the bonus is paid.
- Sole Proprietors, Partners, LLC Members. Bonuses to sole proprietors, partners, and limited liability company (LLCs) members are not deductible, because the owners/partners/members are considered by the IRS to be self-employed. This is one situation in which having a corporation and being an employee of that corporation might result in more tax deductions.
Year-End Tax Planning - 2009 Tax Benefits
The end of the year is fast approaching. Now is the time to review your tax situation and take advantage of tax deductions and credits available to your business. This week, I will be reviewing year-end tax planning, starting today with 2009 tax credits and deductions. These "specials" are only available for 2009; there is no guarantee they will continue into 2010, so "get 'em while they're hot."
Accelerated Depreciation on New Business Asset Purchases
If you can accelerate depreciation, you can increase your depreciation deduction. And as part of the stimulus package, the IRS is allowing you to accelerate depreciation on business assets, through the end of 2009. Here are the details:
- Bonus Depreciation. You may be able to take advantage of the 50% bonus depreciation on qualified business property purchased in 2009.
- Section 179 Depreciation Deduction. The Section 179 deduction has been increased through 2009, up to $250,000 for machinery, equipment, vehicles, furniture and other qualifying property placed in service in this year. A Section 179 deduction allows you to depreciate an item in one year, rather than over several years, increasing your tax deduction for that year.
If you had an operating loss in 2008, you can take advantage of the special provisions at this time to carry back the loss over five years instead of the usual two. So, if your business was profitable in the past, you may be able to get a tax refund if you had a loss in 2008. If your corporation operates on a calendar year basis, you must file your claim by Sept. 15, 2009. For eligible individual tax returns for sole proprietorships, the deadline is Oct. 15, 2009. Use Form 1045 to file a claim for an individual tax return; corporations use Form 1139.
Exclusion of Gain on Sale of Small Business Stock
Shareholders in your small business can exclude 75 percent of the gain on the sale of their stock, for stock acquired after February 17, 2009, and before January 1, 2001, and if the stock is held for more than five years. The exclusion was previously 50%.
Paying Estimated Tax
Small business owners must pay estimated taxes on the profits of their businesses, but this year you may not have to pay as much. The IRS says you may be able to defer a larger portion of your estimated taxes to the end of the year, and to pay only 90% of your estimated tax bill for 2009 instead of 100%. For eligibility and other information, refer to IRS Publication 505.
COBRA Subsidy
If you are providing the COBRA subsidy to any former employees, the IRS reminds you that you may reduce your employment tax deposits by this amount.
Our Friendly, Helpful IRS - the 2010 Tax Calendar
To say, "helpful IRS" sounds like an oxymoron, but it really is true. Particularly for small businesses, the IRS provides many helpful tips, reports, and forms, as well as other helpful information.
Today, my focus is on the IRS tax calendar for 2010. I just received mine by mail and I was very pleasantly surprised. The calendar was colorful and on good heavy stock, with illustrations throughout. Each month even has a "quote of the month."
The theme for the 2010 calendar is "Helping to Grow Your Small Business, " and every month they focus on a different topic. January, for example, is starting up a business, choosing a business structure and a tax professional. Each section is very short, but it gives you a starting place for your information search.
Of course, the calendar itself includes tax due dates, including income taxes, employment taxes,excise taxes, and other taxes. Following these due dates will help you stay on top of your taxes. You can also sign up for my Newsletter and receive timely updates on taxes and reports due each month.
You can order the IRS 2010 Business Tax Calendar online at no cost. I received mine in about 3 weeks, so now is a good time to order.
For more information:
Cruising Has Its Limits - For Tax Deductions, That Is
Back in the good old days, (pre-recession, that is), many business people figured they should get all the good things in life from owning a business. Many owners and board members would plan luxurious vacations and call them "board meetings" and deduct the costs as a business expense. No more. In 
addition to cracking down on entertainment expenses, the IRS also looks unfavorably on conferences, seminars, and board meetings on cruise ships. You can still take these trips, but there are limits.
Cruise Ship Expense Limit
You can deduct up to $2,000 a year for expenses of meetings, conventions, or trade shows held on cruise ships (the IRS considered any ship to be a cruise ship), but only if all the following conditions are met:
- The event must be directly related to your trade or business
- The cruise ship is registered in the U.S. (I found this requirement strange, since most of these cruise ships have non-U.S. registrations)
- All ports of call are in the U.S. or U.S. possessions
In addition, you must provide:
- A written statement detailing the total days of the trip (not including days of transportation to and from the cruise ship port), the number of hours each day devoted to business activities, and the program of scheduled business activities
- A statement by an officer of the organization or group sponsoring the meeting that includes a schedule of each day's business activities, and the number of hours you attended the scheduled business activities.
Conventions Held Outside the North American Area
You cannot deduct expenses for attending a convention, seminar, or similar meeting held outside the North American area unless:
The meeting is directly related to your trade or business, and
It is as reasonable to hold the meeting outside the North American area as in it.
The North American area includes the Caribbean and U.S. possessions in the Pacific. See IRS Publication 463 for a complete list.
Image: Angelo Cavalli/Getty Images
Deducting Car Expenses for a Home Business
After reading yesterday's blog post about car expenses, a reader asked, "How do I know what car expenses I can deduct from my home business? What travel from home to other locations is deductible?"
Can I Deduct Car Expenses Going Back and Forth from my Home Office?
You can deduct business-related car expenses for travel back and forth under these circumstances:
- You work at home or from home and your home is your principal place of business (the place where you earn most of your income or where you do your administrative or management tasks)
- You don't commute back and forth from your home to an office.
- You can prove that the car expenses were business related, not personal.
Two Examples
Sunny works from home as a freelance writer. She has online clients, but she also has local clients. She can deduct any car travel to drop off or pick up work from local clients, and to travel to the office supply store for supplies. She should be careful not to combine business trips with personal ones, like personal banking or a stop at the grocery store.
Karl works out of his home as a manufacturer's representative, and he travels around the state to meet clients and discuss purchases. He does his administrative work at home, so it is his primary place of business. He keeps a log in his car and records mileage for all car travel, from his home to client locations, hotels, and back.
In both of these cases, the small business owners can deduct all business travel to and from their home.
How Do I Prove Car Expenses are Business Related?
The IRS looks very carefully at car expenses for small businesses. They want to see detailed records that:
- Were prepared at the time of the expense (not weeks later) and
- That detail the date, reason for the trip, and include any other information to show that the trip was business-related
What Car Expenses Can I Deduct?
You can deduct all ordinary and necessary expenses related to business travel, but no personal travel. You can deduct these expenses for car travel to and from business locations. For example:
- the home of a client
- the office store where you buy office supplies
- temporary job sites where you work for clients
- places where you meet with clients, customers, or business advisers
- your warehouse or the place where you keep your business inventory
- a convention center where you participated in a business seminar
How do I determine these car expenses?
- You can use the standard mileage deduction rate set by the IRS (55 cents a mile for 2009), or
- You can keep track of actual costs for all car-related expenses.
Using the standard mileage rate is less trouble, because all you have to do is set out the miles traveled for business purposes, but the actual cost method sometimes results in higher deduction amounts.
First-year Rule for Standard Mileage
If you don't use the standard mileage rate the first year of your business, you can never use it again. If you do use standard mileage the first year, you can then select the rate which will give you the highest possible tax deduction.
Remember, although business travel to and from your home based business is deductible, it must be documented and recorded at the time of the trip. Don't get caught shorthanded without these documents in the event of an IRS audit of your business.
For More Information:
More about Taxes for Home Based Businesses
Standard Mileage vs. Actual Expenses - Which is Better?
Are These Car Expenses Deductible?
"I have my company logo on my car. Someone told me I can deduct the car as a business advertising expense."
"Can I deduct expenses for going back and forth from my home to my office?"
"If I can make business phone calls when I'm commuting, can I deduct the car expenses?"
"If I use my car to take business materials, tools and equipment back and forth from home to work, can I deduct these car expenses?"
Small business owners have lots of questions about tax deductions for business use of cars and there is a lot of misinformation out there. These are some of the most common questions. If you have other questions, comment on this post or in the Forum.
Business Vehicles as Advertising
You can certainly deduct the cost of putting the logo on the car as an advertising expense, but you can't deduct the miles you drive around as "advertising." The IRS says, "Putting display material that advertises your business on your car does not change the use of your car from personal use to business use. If you use this car for commuting or other personal uses, you still cannot deduct your expenses for those uses."
Commuting Expenses are Not Deductible
The time you spend driving back and forth from your home to your business is considered "commuting," and it is not deductible as a business expense. Consider it this way - everyone needs to get to work, employees and business owners alike, so this expense is not part of your business.
Use of Car While Commuting
If you use your personal car to transport materials, supplies, or equipment back and forth from home to office, the IRS says this doesn't make the car expenses deductible. Even if you use commuting time to talk on your cell phone about business matters, the car costs are still not deductible. Of course, you can deduct the cost of the cell phone and any additional charges.
Even If the Business Owns the Car
If your business has purchased the car, you still must separate out personal use of that car for tax deduction purposes. Only the business use of the car can be deducted.
For More Information:
Records to Keep for Car/Truck Expenses
Standard Mileage Deduction vs. Actual Mileage Expenses
Disclaimer: I am not a tax professional or Enrolled Agent, and my purpose in presenting this discussion is to provide general information and give you some background so you can talk about this subject with your tax professional.
There is Nothing "Petty" about Petty Cash
Many small businesses have petty cash. You know what I mean - that drawer at the front desk that you use to make change for customers and that you take small amounts from for those donut runs or soft drinks. This drawer contains "petty cash," so-named because it is small (petite) amounts of cash available to a business for making change and for small purchases, needs to be managed in the same way as other assets of your business.
Petty Cash is Not Small Change. If you think petty cash is small, consider this: Let's say you have a weekly staff meeting in your company, and you always buy donuts and coffee. If you spend $15 a week, in a year you have spent $780 for this business expense. If you don't keep track of petty cash and record all petty cash transactions, you can't claim them as business deductions on your tax return. If you don't have a process for petty cash, now is the time.
Answer these questions to get your business set up for petty cash management.
How much money is needed for a petty cash fund?
You want a balance between too little (in which case you must replenish it often) and too much (in which case you have the problem of the money disappearing). The amount depends on (a) the number of customers who pay you in cash and (b) the volume of transactions in which you use petty cash. A good rule-of-thumb might be that you don't want to replenish any more than twice a month. Trial and error will give you a good idea of how much needs to be in the fund.
Who has access and responsibility for petty cash?
The fewer employees who have access the better, but you should have at least two people. The person who replenishes petty cash should not be the person who inputs the transactions into your bookkeeping program.
How should petty cash transactions be recorded?
You can record on slips or a listing, whichever is easier. The important thing to remember is that EVERY transaction must be recorded and must include:
- Date of the transaction
- Amount of the transaction
- General description of the transaction ("donuts for office meeting," for example)
You don't have to record the account number at the time of the transaction. When you replenish petty cash, group transactions by account number and enter them in your bookkeeping program.
When should the petty cash fund be replenished?
The timing differs, but you should replace petty cash (up to the designated amount) when you think you won't be able to go through a day without a problem.
What can the petty cash fund be used for?
That is up to you as the business owner. Typically, petty cash funds are used for (a) making change, and (b) paying for small transactions. You can set a dollar limit on transactions to make it easy for employees to remember. For example, any transaction over $25 needs to be in the form of a check or must have a purchase order or requisition, and should not be taken from petty cash.
How do I deal with theft or suspected theft from the petty cash fund?
It is often difficult to prove theft, so tread carefully here. If you suspect an employee from stealing from petty cash, restrict access to the fund and see what happens. If you have proof of theft from petty cash, contact your attorney before you make any accusations or call the police.
It is your responsibility as a business owner to set up policies for use of petty cash, to monitor petty cash transactions, and to make sure that employees are using petty cash responsibly.
Image: Keith Brofsky/Getty Images
Proposed Changes to SBA 8(a) Program Can Help Your Business
The Small Business Administration has announced proposed changes to strengthen its 8(a) business development program to benefit disadvantaged small businesses. The 8(a) program allows these disadvantaged businesses to compete more easily for business, particularly with the federal government.
How Does This Program Help My Small Business?
If you can qualify as a disadvantaged business, you can become eligible for SBA assistance in obtaining government contracts, which can provide long-term growth for your company.
How Do I Qualify as a Disadvantaged Business?
Your business must first qualify as a "small" business, according to its size relative to other businesses in your industry. Then you must be either:
Socially disadvantaged: a member of a disadvantaged group (subject to racial or ethnic prejudice or cultural bias because of your membership in the group) , or
Economically disadvantaged: socially disadvantaged individuals whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities. You must have a personal net worth less than $250,000 (excluding your primary residence and the equity in your business), and a product or service regularly purchased by the federal government.
The qualification process also includes a review of the composition of your board of directors to be sure the board is controlled by individuals who are socially or economically disadvantaged.
If you think you may be able to qualify as a disadvantaged business, contact your local SBA office.
What Changes are Proposed in the 8(a) Program?
The SBA proposed changes are the result of the first comprehensive review of the 8(a) program in a number of years. Among the proposed changes:
• Joint Ventures - qualifying that 8(a) firms are required to perform a significant portion of the work to ensure that these companies are able to build capacity;
• Economic Disadvantage - providing more clarification on economic disadvantage as it relates to total assets, gross income, retirement accounts and a spouse of an 8(a) company owner in determining the owner's access to capital and credit;
• Mentor-Protégé Program - requiring that assistance provided through the Mentor-Protégé relationship is directly tied to the protégé firm's business plan;
• Ownership and Control Requirements - providing flexibility in admitting individuals of immediate family members of current and former 8(a) participants;
• Tribally-Owned Firms - seeking public comments on the best way to determine whether a tribe meets the criteria of being economically disadvantaged for the 8(a) program;
• Excessive Withdrawals - amending regulations on what is considered excessive as a basis for termination or early graduation from the 8(a) program;
and
• Business Size for Primary Industry - requiring that a firm's size status remain small for its primary industry code during its participation in the 8(a) program.
For More Information:
More Details on Qualifying as a Disadvantaged Business
Details on Business Development/Disadvantaged Status Determination (from the SBA)