Tax Tips for Entrepreneurs

December 13, 2007

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Taxes are one of the most important issues facing entrepreneurs of small and growing businesses, and the days remaining to put your 2007 finances in order are dwindling quickly. If you haven't already done so, now is the time to take action.

By the end of the year, either 90 percent of the tax that is owed or 100 percent of the previous year's tax must be paid; the figure is 110 percent if a business's income exceeds $150,000. You may have waited 'til the last minute, but by making smart tax moves, you can bring a more profitable end to the year. The following are some quick tips for small businesses and entrepreneurs on getting your finances in order.

1. Up-to-Date Accuracy Failure to keep up with estimated tax bills can create cash flow problems as well as the potential for punishing IRS penalties. Ensure the company's financial situation is accurate and current. You might not remember all the details needed to accurately provide all the required information in April of 2008, so ensure 2007's data are in place and accurate -- backed up by documentation the IRS and state departments of taxation might expect.

If you're unsure about what may be needed, consult with your accountant.

2. Defer Income Every cent deferred until 2008 will not be taxed until April 2009. So, whenever possible, request income be sent during the first week of January. Any deferral strategy will depend on your profit and losses for the year and business legal structure (LLC, partnership, corporation, et. al).

Keep in mind that this works only if the business's method of accounting is on a cash basis, so ensure your cash flow can handle the deferred income.

3. Up Your Spending One way to reduce your taxable business income is to take advantage of available deductions. Increase your expenses to maximize deductions. Spend for goods and services. Pay bills for cell services, subscriptions, rent, insurance and utilities. You can even deduct for travel bookings: If more than half of a business trip is devoted to business, deduct the traveling costs, as well as other business-related expenses. Stock up on printer paper, ink cartridges, stationary and other office supplies. Printing machines, packaging machines, industrial robots -- you'll have to decide whether an immediate write-off or spreading out the depreciation over years is best.

Make sure, though, that your new equipment is in use, and deduct for damaged or obsolete goods in your inventory. Consult with an accountant to examine your circumstance and company structure to maximize your deductions.

4. Contribute to a Retirement Plan While you can often delay your 2007 retirement-plan contributions up until the day your taxes are due, some plan rules require you set up the plan by year's end. So make payments to your retirement plan or set one up before year's end to reduce your income for this year. Check the contribution limits for your type of plan, as different types of plans (e.g., 401k, Roth IRA, Keogh, Simple, SEP) have different contribution limits and different deadlines.

In an ongoing development that could potentially affect many small-business owners, consider this report from Reuters yesterday:

If Congress fails to act before the end of the year, around 20 million U.S. taxpayers who otherwise would escape the [alternative minimum tax (AMT)] may end up owing the AMT when they file their 2007 tax return, due by April 15. The Senate last week passed a bill that included no revenue-raising measures to make up for the roughly $50 billion loss to the federal treasury from extending alternative minimum tax relief through this year and might just send that bill to the House.

Although many consider the AMT a tax on individuals, it stealthily strikes harder at small-business owners than at wage earners. For starters, successful entrepreneurs tend to earn more. Plus, 90 percent of small businesses have their profits taxed as personal income, regardless of whether the firm is organized as an S Corp., LLC or unincorporated business. Moreover, when an entrepreneur's income carries him or her into AMT land, some business deductions are not allowed.

On average, those affected by the AMT paid $6,000 more in federal income taxes in 2004 than they would have under the standard calculation. Little may be known of the AMT outside of tax and accounting circles, but every taxpayer -- including small businesses -- should understand it.

Last-Minute Tips:

  • Double-check forms.
  • Use an IRS-provided envelope.
  • Don't panic. The deadline for filing state and federal taxes is midnight tonight.

For additional tips on personal taxes, click HERE.

Earlier: Over-Regulated & Over-Taxed? Settle In.

Resources

Special Report: Top 10 Tax Tips for Small and Growing Businesses AllBusiness.com

5 Year-End Small Business Tax Tips by Darrell Zahorsky About.com: Small Business Information Guide

Home Business Tax Tips by Tara Grant SelfEmployedWeb.com, March 22, 2007

Small Business Income Tax Guide Brookwood Tax Service

House Approves Bill on Alternative Minimum Tax by Donna Smith Reuters, Dec. 12, 2007

Additional (for Personal Taxes)

7 Year-End Tax-Saving Moves by Jeanne Sahadi CNNMoney, Nov. 19, 2007

Energy Tax Breaks: About to Expire by Ashlea Ebeling Forbes, Dec. 5, 2007

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