Sunday, November 27, 2005

Small Business Tax Planning Part 2

Businesses may take these tax moves before the end of 2005 if they are on a calendar year end. On of the major tax actions a small business can make is to purchase new equipment for an immediate reduction in year 2005. This process of “expensing” is allowed up to $105,000 and is subject to a dollar for dollar reduction for purchases over $420,000. The equipment must however be put into use before the end of the year.

The income tax rules for depreciation include conventions that determine how much depreciation a small business can claim in the first year, thus it is important to time your purchase to reap the best tax benefit. The two types of conventions are “half-year” and “mid-quarter” conventions. The half year conventions applies to all property that you begin using during the year as if it was placed in service at the mid point of the year regardless of when it was actually placed in service. The mid –quarter convention is used if the cost of the equipment placed in service during the last three months is more than 40% of the total equipment placed in service for the year. The half year convention can no be used if the mid-quarter rule applies. As you can see it is important to know the cost of all the equipment placed in service for your business to ensure that you reap the benefits of the half-year convention. So if you are thinking about purchasing additional equipment before the end of 2005, speak to your tax advisor to map out a strategy for depreciation.

Other small business tax moves to make before the end of 2005 are:

Delay or accelerate income (billings) to accomplish you tax planning goals
S-Corp and partnerships’ owners can increase their basis by making a capital contribution or loaning the company money before the end of 2005. If a loss is expected these owners can deduct those losses up to their percentage basis in the business.
Sole Proprietors should setup retirement plans before the year end to lower their taxable income.
Paying dividends to stockholders (including yourself) will qualify for a reduced tax rate. These dividends reduce the risk of taxes on accumulate earning and may alleviate any payroll compliance issues relating to excessive executive pay.

One of the most important areas to uncover tax saving is through the creation of a budget. It is important for small business owners to speak with their accountant or tax advisor and setup a budget to ensure that the business goals are met and there is adequate cash flow to reach those goals.

Until next time

Brian N. Stovall
Consultant – Accounting and Business Advisory
The Brico Group, Inc.
Small Business Consulting and Outsourcing

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