I’ve written new-year tax-planning stories year after year, and they’re usually pretty straightforward: an overview of tax changes that have come in for the new year and how to best exploit them. But 2010 is not like the last few years, from a tax perspective anyway. Most of the short-term tax breaks in the American Recovery and Reinvestment Act are expiring, and there’s no visibility yet on what, if anything, in the way of business tax breaks might take their place.
I was discussing this problem recently with tax expert Bonnie Lee, author of Taxpertise: The Complete Book of Dirty Little Secrets and Tax Deductions for Small Businesses the IRS Doesn’t Want You To Know (Entrepreneur Press, June 2009). Let’s say she did not put a sunny spin on things. Between the ballooning national debt and the possibility of national health care being passed along with a business-tax requirement for nonparticipating companies, Lee says there’s a general consensus out there: Taxes are going to go up next year.
“And small business will be a target,” she warned me. “They’re even talking about increasing the FICA tax, something they have not done in decades.”
Even worse, from a planning standpoint, the fate of many beneficial business tax provisions is up in the air. For instance, several juicy tax breaks from ’08 were extended to cover ’09, in particular, bigger first-year and bonus depreciation deductions. But there’s been no decision on what happens next; it’s anybody’s guess if these breaks will survive in 2010; so Lee hopes you made your big purchases last year.
Given the uncertain-to-negative outlook, it’s time to fall back on some basic no-fail tax-avoidance strategies, Lee says.
Reduce your taxable income any way you can. Defer income into 2011, or give money to charity. Start a company health plan with a health savings account, or adopt a cafeteria benefits plan that allows you to tax-shelter more money. Contribute all you legally can to your individual retirement account or 401(k) program.
Become ruthlessly efficient in tracking all business-related expenses. Don’t let any slip through the cracks. You may need every deduction you can get this year.
Stay in close touch with your tax professional or subscribe to the Internal Revenue Service email newsletter so you know about business-tax changes early. Try to economize and put money away, because the tax bill for 2010 may be substantial.