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Act Now To Cut Your Taxes
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.