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Act Now To Cut Your Taxes

Saturday, November 01, 2008
Wait Too Long And You Might Miss Out On Big Tax Deductions
By Suzanne Martin

The year is quickly coming to a close. But you still have time to cut your 2008 tax bill. The trick is to take action now, not wait until April 15 when Uncle Sam expects his dues.

“There are steps you should take before the year ends to significantly save on taxes,” says NASE National Tax advisor Keith Hall, a certified public accountant. “Many micro-business owners miss legitimate deductions because they wait until April 15 to plan for taxes. Then it’s too late.”

Here are five ideas to help you maximize your tax write-offs and minimize your tax bill for 2008. But be aware that all of these tips might not apply to your micro-business. And working with a tax professional is still one of the surest ways to reduce your taxes.

Tip #1: Accelerate Deductions And/Or Defer Income
This strategy requires careful cash flow planning, but it can net you some nice tax savings.

If your micro-business has enjoyed a banner financial year, you can delay your December billing and push those invoices into January. By deferring the income into next year, you also defer the taxes you’ll owe on that income.

On the expense side, you can load up on business necessities before Dec. 31 to increase the amount of your tax deductions in 2008. Purchasing items such as office supplies, stamps and marketing materials by the year’s end gives you write-offs and reduces your tax bill.

You can even preserve your cash by using a business credit card to make those year-end purchases, says Hall.

“Your deductions are based on when they’re charged to your credit card, not when you pay the card bill,” Hall explains. “So you can charge business expenses in late December, take the deduction in 2008, and then pay your credit card bill on its normal due date in January 2009.”

So what should you do if your business suffered a lousy financial year in 2008 and you anticipate increased income in 2009? Reverse the whole plan, Hall says.

“If you think you’ll make more money in 2009 and therefore your taxes will be higher, try to move as much income as possible into 2008, when your tax rate may be lower. Collect invoice amounts before the end of the year so you don’t defer revenue into 2009. Also, if possible, postpone paying your deductible business expenses until January. That way, you’ll get more tax deductions in 2009.”

Tip #2: Take Advantage Of New Section 179 Limits
The Economic Stimulus Act of 2008 allows a qualifying business to expense up to $250,000 of Section 179 property purchased in 2008. The previous limit was $128,000.

Generally, a qualifying small-business taxpayer can elect to treat the cost of certain property as an expense and deduct it in the year the property is placed in service, instead of depreciating it over several years. That can give micro-business owners a big tax break in 2008, says Hall.

“If you anticipate making any big asset purchases in early 2009, consider buying them in 2008 instead and expense them with Section 179 to save on your tax bill this year.”

Computers, office furniture, equipment and other property qualifies for Section 179 expensing, as long as the asset is placed in service during 2008 and the total cost of all your Section 179 property doesn’t exceed $800,000.

Tip #3: Deduct Vehicle Expenses
“The business use of a personal vehicle is one of the most overlooked tax deductions for micro-business owners,” says Hall.

You can use actual expenses or the standard mileage rate to deduct the costs you incur when using your personal vehicle for business purposes.

If you choose the standard mileage rate, be aware of changes that the IRS implemented in mid-year. The IRS normally updates the mileage rates once a year in the fall for the next calendar year. But this year, the agency adjusted the rate in July because of rising gasoline prices.

For business miles driven from July 1, 2008, through Dec. 31, 2008, the rate is 58.5 cents per mile. For business miles driven from Jan. 1, 2008, through June 30, 2008, the rate is 50.5 cents per mile.

Get more information at www.irs.gov where you can download Publication 463, Travel, Entertainment, Gift, and Car Expenses.

“Don’t wait until April 15 to figure your business mileage for 2008,” says Hall. “Get your mileage log up to date and keep it accurate.”

Tip #4: Save for Retirement
Investing for your golden years can give you retirement security later and a tax deduction now.

With most retirement plans, you can establish and contribute to the plan up until April 15, the original due date of your tax return.

“You may have even more time with a Simplified Employee Pension (SEP) since those contribution deadlines can be extended along with a valid tax filing extension,” Hall says.

But, if you want to use a Solo 401(k) for retirement savings, you must establish the plan no later than Dec. 31. You have until your business tax return deadline next year to actually contribute to the plan.

“Micro-business owners must plan for their own retirement,” says Hall. “That means finding the plan that will work best for you. If you wait until next year to establish a plan such as a Solo 401(k), you could miss out on a tax deduction this year.”

For more information about retirement plans for micro-business owners, go to www.irs.gov and download these free IRS publications:

  • Publication 590, Individual Retirement Arrangements
  • Publication 560, Retirement Plans For Small Business
Tip #5: Take The Home Office Deduction
If you’re eligible for the home office deduction, don’t be afraid to take it.

“The fear that taking the home office deduction will trigger an IRS audit is unwarranted,” says Hall. “It is my opinion that there are no IRS red flags surrounding this deduction. And your tax savings can be significant.”

By taking the home office write-off, you not only reduce the amount of income tax you owe, but you also reduce the amount of self-employment tax you owe. With self-employment taxes running 15.3 percent, taking the home office deduction can take a big bite out of your tax bill.

To be able to qualify for the home office deduction, you must use a portion of your home exclusively and regularly for business. To learn more, go to www.irs.gov and download IRS Publication 587, Business Use of Your Home.

Now is the time to prepare to take the home office deduction. Get together your receipts for such items as mortgage or rent payments, insurance, maintenance and repair expenses, and property taxes. You’ll be able to write off a percentage of these costs with the home office deduction.

Want to boost your home office tax deduction this year? Pay your property taxes by Dec. 31 instead of waiting until January 2009.

Suzanne Martinis a freelance writer and editor who is always looking for more tax deductions.

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