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YEAR END TAX PLANNING AND PREPARATION FOR BUSINESSES - Tax Tips for 2007

Now is the best time to start thinking about your year-end tax planning for your business. These tax strategies can be put into effect by the end of the year and some as late as when the tax return is due. Planning now will save you money and reduce your tax liability not only with your federal taxes but also with your state taxes. Here are tax tips that will help you accomplish your goal.

DEFER YOUR INCOME INTO 2008

If you don't receive payment until the first week of January for cash basis tax returns and don't bill until January for accrual basis tax returns, you have effectively deferred your income. This works well if your 2008 income is equal to or less than it was for 2007. If not, you are delaying the inevitable and potentially putting yourself in a higher tax bracket for 2008.

ACCELERATE DEDUCTIBLE EXPENSE INTO 2007

Anything charged on your business credit card December 31st and prior is deductible in 2007 even if it is paid in 2008. You can also write a check on December 31st that you would have normally paid in January. You may want to get a confirmation receipt from your post office to prove you mailed those checks in 2007. This works well if your 2008 income is equal to or less than it was for 2007. If not, you are delaying the inevitable and potentially putting yourself in a higher tax bracket for 2008.

OPEN A RETIREMENT PLAN ACCOUNT

See SMALL BUSINESS RETIREMENT PLANS for an example of what you can do with that available profit tax deferred until retirement. This is a fantastic option for those who have the cash and want to contribute money into their personal retirement account and deduct that contribution from their corporate earnings. Does it get any better than that?

SELF-EMPLOYED HEALTH INSURANCE PREMIUMS

Self-employed individuals are allowed to claim 100% of the amount paid during the taxable year for insurance that constitutes medical care for themselves their spouses and dependents as an above-the-line deduction without regard to the 7.5% of AGI floor.

BUY EQUIPMENT AND SOFTWARE BEFORE YEAR END

If you are in business and purchase equipment you may make a "Section 179 Election," which allows you to expense (i.e. currently deduct) otherwise depreciable business property. In general, you may elect to expense up to $125,000 of equipment costs (with a phase-out for purchases in excess of $500,000) if the asset was placed in service during 2007. In addition, careful timing of equipment purchases can result in favorable depreciation deductions in 2007. In general under the "half-year convention," you may deduct six months worth of depreciation for equipment that is placed in service on or before the last day of the tax year. (If more than 40% of the cost of all personal property placed in service occurs during the last quarter of the year however a "mid-quarter convention" applies which lowers your depreciation deduction.) A popular strategy in recent years is to purchase a vehicle (usually an SUV) for business purposes that exceeds the depreciation limits set by statute (i.e., a vehicle rated over 6,000 pounds). Doing so would not subject the purchase to the statutory dollar limit $3,060 for 2007; $3,260 in the case of vans and trucks. Therefore the vehicle would qualify for the full equipment expensing dollar amount. However for SUVs (rated between 6,000 and 14,000 pounds gross vehicle weight) the expensing amount is limited to $25,000. Taxpayers subject to the 2005 hurricanes can deduct the lesser of $100,000 or the cost of qualified Gulf Opportunity Zone property in addition to the existing $125,000 amount for 2007. In general, the property must be originally used by the taxpayer on or after August 28, 2005 and placed in service before January 1, 2008 (January 1, 2009 for nonresidential real property and residential rental property). The phase-out amount is also increased by the lesser of $600,000 or the costs of qualified Gulf Opportunity Zone property placed in service during the year.

Bonus Depreciation: Taxpayers meeting certain criteria can claim a 50% bonus depreciation allowance for Gulf Opportunity Zone business property that is placed in service before 2008 (before 2009 for nonresidential real and residential rental property) and exempts such depreciation allowances from the alternative minimum tax. (The deadline for nonresidential real property and residential rental property is extended to buildings placed in service before January 1, 2011 for certain IRS identified portions of the GO Zone; and for personal property if substantially all the use of such property is in such building and such property is placed in service within 90 days of the date the building is placed in service.) The original use of the property in the GO Zone must begin with the taxpayer on or after August 28, 2005.

NOL CARRYBACK PERIOD

If your business suffers net operating losses in 2007 you may apply those losses against taxable income going back two tax years. Thus, for example, the loss could be used to reduce taxable income—and thus generate tax refunds—for tax years as far back as 2005. Hurricane Relief: The NOL carryback period is five years for any qualified Gulf Opportunity Zone loss.

BUSINESS CREDITS

Small Employer Pension Plan Startup Cost Credit: For 2007, certain small business employers that did not have a pension plan for the preceding three years may claim a nonrefundable income tax credit for expenses of establishing and administering a new retirement plan for employees. The credit applies to 50% of the first $1 000 in qualified administrative and retirement-education expenses for each of the first three plan years.

Employer-Provided Child Care Credit: For 2007, employers may claim a credit of up to $150,000 for supporting employee child care or child care resource and referral services. The credit is allowed for a percentage of "qualified child care expenditures" including for property to be used as part of a qualified child care facility, for operating costs of a qualified child care facility, and for resource and referral expenditures.

GET ORGANIZED

If you haven't already done your accounting and reconciled it to your bank statements, you have some catching up to do. Knowing where you are at financially is the true measure of your performance. It allows you to make better business decisions and to be more successful financially.

TAX PLANNING FOR YOUR INDIVIDUALS

Go to YEAR END TAX PLANNING FOR INDIVIDUALS for what you can do to prepare your personal taxes for year end.

These are just some tax tips you should consider when thinking about your year-end tax planning for your business.

This article was intended to provide general information about year-end tax planning. It does not contain all the rules and exceptions that may apply to your situation. If you have further questions regarding year end tax planning, I can be reached at www.dgoodmancpa.com.

About the Author

Dianne Goodman, CPA, FCPA - Specializes in servicing Small Businesses and Individuals. Visit www.dgoodmancpa.com for relevant and current information on a variety of financial and tax issues focusing on small businesses and individuals or call at 1-888-851-1975.

CONTACT INFORMATION:

Dianne Goodman, CPA, FCPA
Comprehensive Small Business Solutions, PC
505 323-2307
1 888-851-1975 toll free
www.dgoodmancpa.com