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Tax Planning Basics for Businesses

Minimize Income, Maximize Deductions, Use Credits, Review Financial Statements


It's never too late or too early to do business tax planning. The best time to tackle tax planning is mid-year, because you still have time to put strategies into action. But even at the end of the year, there may be opportunities you can take advantage of.

First, go back to the basics of tax planning
William Perez, Guide to Taxes, suggests that your tax planning goal is to (a) minimize income, (b) maximize expenses, and (c) take advantage of tax credits. There are many ways to conduct tax planning, and the best time to do tax planning is now. Check with your tax advisor about any strategy you think you might be able to use. Look at some ways to plan to create strategies to do as much as legally possible to create the best possible tax situation for your business.

Consider your Business Type
Your business type can make a big difference in the amount of tax you pay. And business situations change. Companies go from being in the red to making a profit, and the life cycle of a business may take you up and down. While it's not a good idea to change your business type often, there's something to be said for reviewing your situation with a tax attorney or CPA and considering changing your business type to capture tax advantages from your company's situation. Take a look at the articles below and discuss your options with your tax advisor.

Buy Equipment, Take Advantage of Depreciation Deductions

Section 179 Accelerated Depreciation
With increased Section 179 depreciation deductions in 2011, you can claim a tax deduction for the entire cost of new and used equipment and software. The Section 179 deduction in 2011 is now $500,000 (up from $250k previously). The deduction is good on the purchase of new and used equipment, including new software. This depreciation deduction expires at the end of 2011, so consider buying now rather than waiting.

Bonus Depreciation
In addition to the Section 179 depreciation deductions mentioned above, you can also claim up to 100% bonus depreciation on the cost of new (not used) equipment and software. You must place the assets in service (start using it) by December 31, 2011. This tax break also applies to vehicles, and it also expires December 31, 2011 unless the Congress decides to extend it.

Improve facilities for More Depreciation Deductions

The tax laws usually don't consider real estate in the Section 179 deduction section. But for 2010 and 2011 you can deduct up to $250,000 of qualified improvement costs for certain kinds of real property: interiors of leased non-residential buildings, restaurant buildings, and interiors of retail buildings. If you need to make improvements, do them now, because the tax break won't be available after 2011 unless it is extended by Congress.

Carry back Net Operating Losses (NOLs)

Because the economy is still unstable, the tax laws are more flexible in allowing you to carry back net operating losses. You can carry back NOLs for more years, to offset gains in those years. This one's tricky, so check with your tax advisor if you think you will have a loss in 2011.

Capture Business Travel Costs

With the IRS standard mileage rate increased to 55.5 cents beginning July 1, 2011, make sure you are capturing every mile driven for business purposes. All of those miles driven should be logged as they are driven, because the IRS may not allow the deduction if you can't show "contemporaneous" (at the time it happens) records. Other travel costs are deductible too, including conventions and cruises (for business purposes, of course).

Lease a Car for Business Use
2011 might be a good year to lease a car for your business. The IRS has increased the allowable first-year depreciation deduction to 100%, for business property (including some leased cars) put into use by December 31, 2012. But there's more: The Act was further amended to allow a 100% additional first year depreciation deduction for qualified property acquired after September 8, 2010, and before January 1, 2012 and put into service before January 1, 2012. The fair market value of the leased vehicle must be $18,500 or more.

Record Business Startup Costs

Whether you are in the process of starting a business, planning to start a business, or just opening your business, all of your startup costs should be recorded so you can take advantage of higher startup expense deductions. For tax years after December 31, 2009, you can deduct up to $10,000 for start-up costs, but there is a dollar-for-dollar reduction of the $10,000 deduction if startup costs exceed $60,000.

Calculate Home Office Expenses
If you work from home and you have not taken any home office deductions, now might be time to think about doing this. Before you start the process of calculating deductions, make sure (1) that you are using the office regularly and exclusively for business purposes, (2) that you make a floor plan showing the areas you use for your business and the percentage of the square feet of the home, and (3) that you keep detailed records of expenses to substantiate your deduction. Read more about home businesses and taxes, then talk to your tax advisor.

Review all Business Expenses, Look for Possible Deductions
Check this article on Business Tax Deductions A to Z to see what you might be able to take advantage of. For example, look at parking tolls, coffee and beverage services in the office, taxi and bus fares, casual labor and tips, business magazines and books you bought. Those little costs can add up to big savings at tax time.

Donate Excess Inventory, Unused or Obsolete Equipment to Charity
Donations of inventory or equipment can be donated to charity for a tax deduction. For pass-through business types, like sole proprietors or LLCs, the deduction is taken on your personal tax return. Donations by corporations can also be deducted. Read more about deducting business donations to charity

Page 2 includes additional tax planning strategies, such as taking advantage of tax credits, planning to decrease your risk of audit, and, most important, keeping good records.

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