With 2009 coming to a close, I am now meeting with clients, looking at their projected financial results for the year and considering some ideas to minimize their taxes. All businesses should do some tax planning right now and consider some tax avoidance (as opposed to tax evasion) strategies. Here are a couple of ideas:
1.) Equipment expense - If you need to upgrade any equipment or fixed assets, then you should purchase these items in 2009. A business can deduct up to $250,000 for capital purchases that occur in 2009 (as opposed to depreciating it over several years). If your business spends in excess of $250,000, your business can also claim first year bonus depreciation equal to 50% of the cost of the new (not used) asset.
2.) Bad debt expense – A reserve for bad debts is not deductible for tax purposes. However, you can write-off a receivable if it is not collectible. Take a look at your accounts receivable balance and write-off any that you know will not be collected.
3.) Hire your children in the business - Consider adding your children to the company payroll. If you employee your children on the company payroll, you can pay them $5,700 in salary that will be free from federal income tax. Subsequently, have your child put $4,000 of this money into a Roth IRA where it grows tax-free over time. If the money remains in the account until your child turns 59 1/2, they will never pay any taxes on the money.
4.) Cost segregation study – If you purchased, built or remodeled an existing building, consider having a cost segregation study performed. Under the existing tax code, commercial real estate is depreciated over a 39 period. This is not very good treatment from a businesses tax perspective. A cost segregation study identifies components of the building, such as fixtures, landscaping, security systems, etc. that can be subject to accelerated depreciation methods. These accelerated depreciation methods can greatly increase your current year deductions.
5.) Accelerate deductions / defer income – Take a look at upcoming expenses. If you have any significant repairs and maintenance that need to be done or need to purchase supplies, complete these transactions in the current year to gain the deduction. Also, ensure all employee expense reports are submitted timely so you can deduct these amounts in 2009. If you have unwanted furniture or equipment, donate them to charity now. You may also be able to postpone recognizing revenue until 2010. All these things will defer income and taxes until 2010. One thing to note, if you expect your income to be significantly higher in 2010, this strategy may not be beneficial as you could be in a higher tax bracket.
6.) Maximize contributions to retirement plans – Business owners should maximize their contribution to qualified retirements plans. There are multiple options available to business owners, including, and one should consider the options to maximize this deduction and income deferral.
7.) Capital gains rates – The capital gains rate of 15 percent comes to an end at December 31, 2010. These rates are set to increase in 2011 and based on the current federal deficit, do not expect it to be extended. While there is still some time left on this, business owners should consider ways to utilize these lower rates.
8.) Annual gift exclusion – You can gift up to $13,000 to an individual in 2009 with no tax implications ($26,000 if your spouse elects to give as well). This will help mitigate your future estate tax issues and reduce future taxable interest and dividends.
9.) Consider a Roth IRA conversion – Starting in 2010, the income limit on converting a traditional IRA to a Roth IRA is lifted. Thus, higher income tax payers can make a conversion. Furthermore, the tax created can be deferred over two years.
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