There are thousands of dollars at stake, too, with several important rules expiring this year unless Congress acts to extend them.
Here are Etzler’s top seven tips for year-end business tax planning:
1. In this season of shopping, consider making some purchases for your business. Purchases of most capital equipment, including furniture, computers and most vehicles, may qualify for more generous expensing options than will probably be allowed in the future. For the 2011 tax year, tax code Section 179 allows a deduction of up to $500,000 for qualified purchases (either outright, financed or through a capital lease) of up to $2 million. That means many small and medium sized businesses that make purchases by year end might be able to deduct most, if not all, of their outlays for machinery and equipment. Without an extension by Congress, the $2 million limit drops to $560,000 next year, and the maximum deduction drops to $139,000. Similarly, the current ability to write off 100% of the purchases in the year bought (rather than an amount prorated for use during the purchase year) may go away next year, too.
2. Pull the trigger on late-year hires. Take advantage of expiring credits worth up to 40% of the first $6,000 in wages (or $2,400) if you hire qualifying workers (such as certain veterans or food-stamp recipients) by the end of 2011. Under current law, that credit won’t be available for workers hired after this year. Check for details and for more information on partial credits for late-in-the-year hires. A lot of states also offer these types of credits.
3. Explore your next growth vehicle. Certain credits for research and product development won’t be available for post-2011 expenditures unless Congress extends the credit. Startup companies and established businesses alike can claim tax benefits for consulting, legal and professional fees and other labor costs, as well as materials, if they are tied to research and development of a product or new market and have proper documentation.
4 Self-employed? Get set for retirement. Now’s the time to research and set up a smart plan for retirement. Changes in recent years provide a lot more flexibility for self-employed workers to use a combination of IRAs (Individual Retirement Accounts) and investments held in IRAs and still receive tax advantages. Doing the legwork now may allow you to start 2012 with a plan that takes full advantage of appropriate financial benefits.
5. Consider waiting until 2012 to cancel debt or dispose of loss-producing rental properties or other so-called passive activities. Depending on your situation, waiting to do these things might allow you to deduct suspended losses.
6. Boost your ownership stake in order to deduct a 2011 loss. If you own an interest in a partnership or S corporation, you can typically only deduct losses up to the value of what you’ve put into the entity. You may need to increase your commitment (by boosting capital, in the case of an S corp, or in the case of a partnership, by providing cash, by loaning, or by personally signing on the entity’s debt) in order to deduct maximum losses in 2011.
7. Consider bonuses. In some cases, companies can take a deduction for the current tax year for bonuses actually paid the following tax year. Bonuses can’t be for an employee owning more than 50 percent of the value of the corporation’s stock, and the bonus must be accrued on the books by the end of the current tax year. In addition, the bonus must be paid within the first 2.5 months of the following tax year. Employees don’t pick up personal income taxes on the bonus until the following year, too.
Paul Etzler is a member of both the American Institute of Certified Public Accountants and the Ohio Society of Certified Public Accountants, where he serves as member of the Members’ Services Advisory Council and the Leaders’ Council.
Lauren Prosser is a manager of advisory services atSageworks, a financial information company, collects and analyzes data on the performance of privately-held companies and provides financial analysis software.