Tax Savings Tips For The Small Business
By Arik Rozen CPA, Mon Jan 2nd
Deferring income
Shifting taxable income from the current to the next tax year isuseful only if you expect your next year's income to be equal orless than your current year's one.
* Waiting for a bonus? Keep waiting. Applies only toCash-Basis-Tax-Payers. See if you can receive it in January ofnext year. Doing so will exclude the bonus from this year W2 /1099 (and taxable income) and reduce your taxes for this year.
* Postpone interest income - Transfer money market accountbalance (savings), to a Certificate of Deposit. Make sure thatthe CD pays interest only at maturity. Interest income generatedby the CD will be taxable only when the CD matures, so you willstill get interest income only it will be taxed next year.
* Selling gaining stocks - Sell gaining stocks (current marketprice is higher than your original cost) after January 1st ofnext year. There are two exceptions:
1. Exception that Price will decrease - sell now.
2. Own loosing stocks that can offset the gains.
* Converting regular income to long-term capital gain - Ingeneral, gains from selling stocks you hold for 12 months ormore, are subject to a 15% long-term capital gain while gainsfrom selling stocks you hold less than 12 months are taxedsubject to your highest tax bracket.
Accelerate expenses
Cash-Basis-Tax-Payer will benefit from paying next year expensesbefore the end-of-the-year. Those expenses which will be paidanyways will be deductible this year if paid before December 31.
* Donation - if you are planning to donate cash or property, doit before December 31.
* Property taxes - pay next year real estate tax before the endof the year.
* State taxes - pay your state taxes on your capital gains andbusiness income.
* Medical expenses - do so only if your overall medical expensesare over 7.5% of your Adjusted Gross Income, otherwise it is notdeductible.
* Employee's unreimbursed expenses - only if they are over 2% ofyour Adjusted Gross Income otherwise it is not deductible.
Maximize tax credits
* College / high education tuition - Paying tuition for you or adependant? make the payment before the end of the year andbenefit from a credit (note that the credit has very strictincome threshold which causes you to loose the credit) *Childcare credit - for two working parents (or students), youcan get up to $480 per child. If you have flex plan to cover it- spend your unused "Flex" balance.
Retirement Planning
There are several retirement plans that allow self employed andmicro business owners to make contributions and achieve both:
1. Tax deductions to offset self employment or business income2. Financial planning for the future
(SEP) IRA ---------
A simplified employee pension (SEP) IRA allows an employer tomake contributions toward his or her own (if self-employed) oremployees' retirement. Employers can contribute a maximum of 25%of an employee's eligible compensation or $42,000, whichever isless.
Self-employed's contribution is based on the net profit from thebusiness (self employment income and not the gross income).
Per IRS regulations employers must include all eligibleemployees who are at least age 21 and have been with a companyfor 3 years out of the immediately preceding 5 years.
For calendar year corporations with a March 15, 2006 tax filingdeadline, SEP-IRA contributions must be made by the employer bythe due date of the company's income tax return, includingextensions.
The contributions are deductible for tax year 2005 as if thecontributions had actually been contributed within tax year 2005.
Sole proprietors have until April 15, 2006, or to theirextension deadline, to make their SEP-IRA contribution if theywant a 2005 tax deduction.
Solo 401(k) -----------
Established by the Economic Growth and Tax Relief ReconciliationAct of 2001, Solo 401(k) plan provides a great tax break tomicro business owners. In addition to the possibility to shelterfrom taxes a large portion of income, some Solo 401(k) plansoffer a loan feature for cash-strapped small business owners.
Eligibility for a Solo 401(k) plan is limited to those with asmall business and no employees, or only a spouse as anemployee. This includes independent contractors with earnedincome, freelancers, sole proprietors, partnerships, LimitedLiability Companies (LLC) or "S" corporations.
The
key benefits of the Solo 401K plan include:
* High limits on contributions: elective salary deferrals andemployer contributions allows sole proprietors to contribute upto $42,000 ($45,000 if age 50 or older) in tax year 2004, basedon salary deferral plus profit sharing (see below).
* Contributions are fully-tax deductible and are based oncompensation or earned income.
* Assets can be rolled from other plans or IRA's to a Solo 401K.There is no limit on roll-overs.
* The account holder can take a loan that is tax-free andpenalty free from the Solo 401K, if allowed by the plan, up tothe lesser of 50% or $50,000 of the account balance. Thecontribution limits depend on how the business is established.Overall, the total of deferred salary and profit sharing thatcan be put in one of these accounts in one year is limited to$40,000:
* For businesses that are not incorporated, the salary deferraland the profit-sharing contributions are based on net earnedincome. The maximum contribution limit is calculated based onsalary (max deferral of $12,000) and profit sharing up to thecurrent max contribution. Contributions are not subject tofederal income tax, but remain subject to self-employment taxes(SECA). The owner receives a tax deduction for both salarydeferral and employer contributions on IRS Form 1040 at filingtime.
* For corporations, the maximum elective salary deferral amountfor 2003 is 100% of pay up to $12,000 ($14,000 if age 50 orolder). The maximum employer contribution (profit sharing) is25% of pay, and is based on the W-2 income. It is not subject tofederal income tax or Social Security (FICA) taxes. The salarydeferral contributions are withheld from your pay and areexcluded from federal income tax but are subject to FICA. Thebusiness receives a tax deduction for both salary deferral andemployer contributions.
Keogh plan ---------
A Keogh plan is a tax-deferred retirement savings plan forself-employed. In general self-employed individual maycontribute a maximum of $30,000 to a Keogh plan each year, anddeduct that amount from taxable income.
Profit Sharing Keogh -------------------- Annual contributionsare limited to 15% of compensation, but can be changed to as lowas 0% for any year.
Money Purchase Keogh -------------------- Annual contributionsare limited to 25% of compensation but can be as low as 1%, butonce the contribution percentage has been set, it cannot bechanged for the life of the plan.
Paired Keogh ------------ Combines profit sharing and moneypurchase plans. Annual contributions limited to 25% but can beas low as 3%. The part contributed to the money purchase part isfixed for the life of the plan, but the amount contributed tothe profit sharing part (still subject to the 15% limit) canchange every year.
Taxes are due when the individual begins withdrawing funds fromthe plan. Participants in Keogh plans are subject to the samerestrictions on distribution as IRAs, namely distributionscannot be made without a penalty before age 59 1/2, anddistributions must begin before age 70 1/2.
Setting up a Keogh plan is significantly more involved thenestablishing an IRA or SEP-IRA.
Tax USA Inc. ------------
Tax USA, Inc. is a complete tax, accounting and financialmanagement firm specializes in small businesses, corporationsand high income individuals. Tax USA Inc.'s mission is to exceedclients' expectation by providing superb tax, accounting &financial Management services. We offer our clients tax,accounting and bookkeeping services, CFO Outsourcing, BudgetReview and Business Plans, Cash Flow Management, PayrollServices and Entities' Incorporation.
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About the author:ARIK ROZEN, CPA --------------- Mr. Rozen is a certified PublicAccountant; holds a BA in accounting and M.B.A. (majored inFinance). Mr. Rozen has 15 years of experience in tax, publicaccounting and financial management, serving in a range ofexecutive financial positions and as an independent CPA forvarious companies and organizations. Mr. Rozen has specializedin accounting and taxation of micro and small businesses. In thepast few
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