Though the end of the year is rapidly approaching, there´s still time to minimize your exposure to Uncle Sam next year. If you haven´t already, consider the following ideas from the NFIB now to ease your tax burden.
Thanks to the work of the National Federation of Independent Business, small-business owners are enjoying increased expensing limits as they prepare their 2006 tax returns. Last May, Congress approved an extension of the increased Section 179 expensing limit, effective through 2009. That limit is now up to $108,000 for the 2006 tax year due to the annual inflation adjustment. If you prefer to receive immediate tax benefits from purchasing office supplies, rather than spreading the cost over several years as a depreciation expense, then go ahead and purchase that new equipment-computer, software, furnishings and machinery-before the end of the year and write off that cost for the 2006 tax year.
Gifts to legitimate business associates, including clients and customers, are deductible up to $25 per gift. You also can deduct the price of incidental costs that don´t add value to the gift, such as shipping and handling costs.
Certain de minimus fringe benefits are tax-free to the employee and fully deductible by the employer. If you´re in the spirit of giving this holiday season, you may be able to deduct certain gifts to your employees as long as they have a low fair-market value. A cash gift, or cash equivalent such as a gift certificate, is not deductible and is considered taxable compensation to the employee. You should consult with a tax professional to determine the appropriate amount. With all gifts, save your receipts for proof of the expenses in the event of an IRS audit.
If you set up a qualified retirement plan before Jan. 1, 2007, you can, in some cases, reap the tax benefits on your contributions until Oct. 15, 2007, the extended deadline for your 2006 tax return. Options for small-business owners include IRAs, SEP-IRAs, SIMPLE plans and 401(k) plans.
Charitable giving not only helps your community, it helps your tax bill. To be eligible for your 2006 tax return, gifts must be postmarked by Dec. 31, even if they´re received in January. With your donation of cash, property, insurance, securities or goods, ask for a tax letter and a receipt that you can include with your return.
Employees can be rewarded with additional compensation, and there´s a special break for accrual basis businesses: Bonuses to rank-and-file employees declared in 2006 are deductible this year, as long as they´re actually paid by March 15, 2007.
If 2006 wasn´t a good year for your business, make sure you can use tax losses to your advantage. For example, if you´re an S-corporation shareholder, be sure there´s sufficient basis in your corporate stock and debt (money you loan to the corporation) to fully utilize your share of corporate losses. If you need more basis to offset the losses, you could make additional loans to the corporation before year´s end. Or, if there are outstanding third-party loans to the corporation for which you´ve given your personal guarantee, try asking the lender to recast the loan, making you primarily liable for the debt so that you can add this amount to your basis.
Of course, articles like this one are intended for informational purposes only and are not a substitute for professional tax advice. You should always consult with your tax planner to see if these tax-savings techniques are right for you.