Admit it, you don’t really think about taxes before you turn your shoebox full of receipts over to your accountant sometime in March, right? She gives you back a form and you sign it and send it in along with a fat check, if you’ve had a good year, or maybe, if the year sucked (2008?) you actually get some money back. How about this year we take preemptive action and make a strategy to keep some of that hard-earned cash in your pocket, instead of lining Uncle Sam’s pockets?
- Ditch the shoebox of receipts – Yeah, I’m going to continue beating this horse. If you’re not using a business software like Quickbooks or a personal finance software like Quicken or Mint then crawl out from under your rock, slouch out of your cave, and take an evolutionary step to get started and be up and running by 01/01/18. If you have already joined the 21rst century then get your records in order. This is especially essential for the e-entrepreneur who ought to have a pretty good idea of what her net income will be by this time of year.
- Open up last year’s can of worms – Take out your last years 1040 and go down the form, estimating what the numbers for the current year will be. I always do this for my clients because I don’t want to forget about any particular item of income. Do the same with key forms, like the Schedule C for most of you. Compare your current year’s numbers to the prior’s so that you don’t overlook any item of income or expense.
- What entity are you? – Most of you are probably recording your online earnings on the Schedule C, I know that I am. As your business grows and prospers, however, it may be time to take a second look and consider incorporating your business into an LLC, a traditional C-Corp, or an S-Corp. Steve at My Wife Quite Her Job has an excellent primer on business entities. Many people who have never considered the old-fashioned C-corporation are giving it a second look in today’s environment of high and likely rising marginal tax rates. I highly recommend seeking the opinion of a tax expert before making a decision on a legal entity.
- Dip into Uncle Sam’s pocket for a change – Once you have a grasp on your expected income and, therefore, a rough idea of your tax liability, it’s time to start looking into your rich Uncle Sam’s annual giveaway to his favorite causes (this could also cynically be described as a cheap ploy to buy your vote). Whatever your take, don’t leave any free money on the table. This years big giveaways include credits for buying a new home, credits for “energy-saving” home improvements, accelerated depreciation for new assets placed in service, and many, many more. Turbo Tax has an excellent list of current tax credits.
- Pay today for Tuesday’s hamburger – The government has continued its 50% accelerated depreciation this year plus Section 179 100% depreciation for up to $250,000 on most items. Essentially, this gives you the option of writing off the entire amount of most equipment and software you purchase this year. The IRS website can let you know what property qualifies, note that most motor vehicles and real estate improvements do not. So go ahead, splurge on that shiny new laptop or killer app, Uncle Sam is helping you pay for it!
- Pay your bills now, bill your customers later – credit card payments are same as cash, as far as the IRS is concerned. If you’re facing a big tax bill in 2009, paying bills and vendors now for items and services you will need in 2010 could be a smart thing. However, if 2009 was a dud for you and things are looking up for 2010, now may be the time to accelerate some billings and delay some purchases, giving you a little more cushion for 2010. Many people point that speeding up expenses now only delays your income tax, it doesn’t reduce your bill over time. After all, you will have to make it up the next year. This is partially true, but the strategy is still worthwhile because, first, five dollars in your pocket now is better than five dollars in your pocket a year from now, and second, because of income phase-outs for certain credits, the Alternative Minimum Tax, and other excentricies of our tax code you can actually lower your overall tax bill over time with this method. Similarly, if you are worried about running afoul of the hobby loss you can use this same strategy to bunch earnings and losses into separate years to make the safe harbor.
- Free retirement money – With many plans you don’t even have to know by December 31, most allow you to delay the funding, and perhaps even the establishing, of the plan up until the deadline of your tax return. With extensions that can be all the way up until October 15, 2010. Even the biggest procrastinator should be able to make that deadline! Kiplinger has a handy reference for what plan works best for what people but, and this is key, every plan offers you the chance to invest for your retirement while delaying or avoiding taxes! This is one of the best deals in town. If, after following the above procedures you determine that you will make $50,000 this year, you could set up an SEP, contribute $8500 to the plan and then only pay income taxes on $41,500 of income; at the 25% marginal tax rate that you would be subject to that is saving you $2,125 in federal income taxes! Plus more savings on your state income taxes! If keeping the government’s grubby paws from making off with $2,125 of the earnings from your blood, sweat and talent doesn’t excite you, then make more money!
This quick rundown leaves a lot of stones unturned. Suffice it to say, as a business owner your life is much more complicated than before. However, the flip side of that is more control over your life, including your tax life. So let me know of the strategies that have worked for you that I have overlooked. Also, I always love a tale that has the happy ending of some industrious business owner able to save some money on taxes, which they subsequently reinvest into the economy and create jobs and generate wealth for the world. Sort of makes you feel warm and fuzzy all over, doesn’t it?