Guest columnist Barbara Weltman, author of "Small Business Taxes 2012" writes about tax deductions every small business owner should consider.
As we enter the last few weeks of 2011, the to-do list seems to grow longer. One thing small business owners should do is consider whether they have done everything they can to reduce their tax burden. Even at this late date, there are things you can do that will reflect favorably when you file your 2011 return.
Here are 10 things you can do before the end of the year that will let you take advantage of tax write-offs. And always keep in mind, if you have any questions about tax rules affecting your business, discuss them with your tax advisor.
1. Give cash year-end bonuses
Like any compensation, the bonuses you give to employees are tax deductible. The bonuses are also subject to payroll taxes; these taxes are tax deductible as well.
If your business reports on the accrual basis, you don’t even have to disburse the bonuses this year. As long as they are declared before the end of the year, they are deductible this year provided you pay them by March 15, 2012. However, when giving bonuses to 50percent-C corporation owner-employees and S corporation owner-employees with any ownership interest, they are deductible only when actually paid.
2. Give company stock as a year-end bonus
If you’re willing to share ownership with your employees, you can give company stock as bonuses. The bonuses are usually taxable to employees just like cash and are subject to payroll taxes provided there are no restrictions on the stock.
If your company is a C (regular) corporation in certain industries—manufacturing, technology, retail, and wholesale — the stock you give can enable employees to earn tax-free capital gains. As long as they hold the stock for more than five years, there’ll be no tax on their profits. This 100 percent exclusion for so-called “Section 1202 stock” is set to apply only to stock issued by the corporation before Jan. 1, 2012.
3. Buy new equipment
Need a new computer? Some heavy machinery? Office furniture? If you put it to business use by December 31 you can deduct all of the cost on your 2011 tax return rather than depreciating the cost over a number of years. Using 100 percent bonus depreciation, the cost of new equipment and machinery is deductible without any dollar limit.
4. Buy used equipment
If you’re trying to save money by buying pre-owned items, you can still claim a generous write-off. Under the first-year expensing (Section 179) deduction for 2011, up to $500,000 of the cost of equipment and machinery is deductible, provided you are profitable. You can’t benefit from this break if you’re in the red. But you can finance the purchase in whole or in part.
5. Donate cash
Your business can make cash donations to IRS-recognized charities. The deduction for contributions by individuals (including owners of sole proprietorships, partnerships, limited liability companies, and S corporations) is 50 percent of adjusted gross income; for C corporations it is 10 percent of taxable income.
You must follow recordkeeping rules explained in IRS Publication 526.
6. Donate inventory
Instead of giving cash, you can use inventory to benefit a charity. Certain types of inventory donations may even entitle you to an enhanced deduction, including food, books and computers.
Some of the enhanced donations are limited to C corporations, so check with your tax advisor.
7. Set up a qualified retirement plan
You can shelter your profits while saving for retirement by adopting a qualified retirement plan, such as a 401(k) or profit-sharing plan. As long as you sign the paperwork with the financial institution at which you’ll keep the plan, you then have until the extended due date of your 2011 return to make contributions that will be deductible on your 2011 return.
If you have employees, you must include them in the plan on a nondiscriminatory basis. Factor in the cost of covering employees when you decide which type of plan to use and how much to contribute. Find more information in IRS Publication 560 .
8. Pay outstanding bills
Cash-basis businesses can deduct the payment of invoices when they are made. If you have accounts payable on your books, cleaning them up before the end of the year will help not only your tax picture but your balance sheet as well.
9. Order next year’s supplies
Buy now what you expect to use next year. Consider office supplies, cleaning supplies, and other items that will be used by your business within the year. Again, on the cash basis, you can deduct the supplies now even though you’ll use them next year.
10. Renew subscriptions and membership dues
Before the end of the year, decide which subscriptions and dues in professional and trade associations you’ll want for next year. Pay for them now. But be aware that under a special 12-month tax rule, you can only deduct the portion of subscriptions and dues that will be used by the end of next year. In other words, a three-year subscription may save you on renewal fees but it won’t give you a tax deduction now for the full cost.
Barbara Weltman is an attorney, author, and trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® at www.barbaraweltman.com and host of Build Your Business radio. She has been named one of the 100 Small Business Influencers for 2011. Follow her on Twitter @BarbaraWeltman.