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Year-end taxes: what to do when there's no silver bullet

Clients often ask if there is "something big" they can do before year end to drastically reduce their tax liability.  Sadly, the "silver bullet" is a myth.  Fortunately, we have some real tax planning tools.  They may not slay the tax vampire, but they will make it much less scary.

20071211ib3_2 BE SURE HAVE ENOUGH BASIS TO TAKE ANY LOSSES.  Most businesses nowadays are "pass-through entities" -- S corporations or partnerships (including LLCs), where the earnings are taxed on the owner's individual tax return.  In order to deduct any losses from your business, your need to have enough basis in your stock or partnership interest to cover your loss.  Basis starts with your investment in the business, and it increases for undistributed earnings and declines with losses.  Sometimes basis can also include loans to the business.  Putting a little cash into your business at year-end might help your cash flow a great deal in April.

20071211ib4 IS IT TIME TO BUY SOME ASSETS?  The tax law allows most businesses to deduct purchases of up to $125,000 of assets that would otherwise be depreciated.  This so-called "Section 179 Deduction" is fully available for businesses that purchase up to $500,000 of depreciable assets.  If you need some equipment or software in your business, and you aren't a rental real estate operation, a purchase by year-end could make a nice dent in your tax bill next April.

20071211ib2 SHOULD YOU LOOK AT A QUALIFIED PLAN?  Some of the best tax deductions for retirement plans are reserved for "qualified" pension and profit sharing plans.  For example, if you are a sole proprietor with no employees, you may be able to deduct up to $45,000 in a contribution to a 401(k) plan for yourself.  It's a great deal - you are taking money from one pocket and putting it in the other, and taking money from Uncle Sam in the process.  In order to deduct a contribution to such a plan, the plan itself needs to be in place by year-end.

FIRST, FIGURE OUT WHERE YOU STAND.  You can't do any tax planning unless you have a pretty good idea what your income looks like for the year.  Get your bookkeeping in order, then get thee to your tax advisor and set yourself up for Happy New (tax) Year.

No, you won't find a silver bullet for your tax problems.  With the right tools and some help from your tax advisor, though, you can take care of your year-end business tax planning.

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Comments

Small businesses should definitely be planning for year-end taxes prior to Dec 31st. One great option mentioned to reduce taxes is Section 179. A simple calculator http://www.crestcapital.com/tax_deduction_calculator you can use to determine tax savings on various $amounts is a great place to start. If you don't have cash available to add equipment, furniture, etc, certain leases and loan structures qualify for the Section 179 expensing allowance.

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