November 1, 2005
William Lynott
If you’re inclined to let your accountant do all the worrying about your business and personal income taxes, you could be making a costly mistake. “Your accountant may be the tax expert,” says Tom Normoyle, CPA, Huntingdon Valley, PA, “but no one knows the fine details of your finances as well as you do. That’s why your accountant needs your help to hold your income taxes to a minimum.”
You have until December 31 to reduce your tax bill. Here are eight steps you can take now to slash your 2005 taxes.
ACCELERATE PAYMENTS AND DEFER INCOME
Tax experts agree that accelerating payment of bills and deferring income are among the most effective ways for you to reduce current year taxes.
“Prepay as many of your business-related bills as possible by December 31,” says Paul Rich, CPA, Siegel Rich Division of Rothstein Kass, Roseland, NJ. “ Prepaying your rent and anticipating supply needs are effective ways to reduce current year’s taxes.”
Rich suggests that you consider buying your first three months of nonfood supplies for next year before December 31. Also, pay any outstanding bills before year-end. If you don’t have the cash, use your credit cards. “The IRS allows you to take the deduction in the year of the charge; you don’t have to wait until you pay the bill to take the deduction,” says Rich.
Prepaying interest expense on any outstanding loans is another way to save on this year’s taxes. If you use a postage meter, consider filling it up before year-end.
Other expenses that lend themselves to prepayment are state and local taxes and professional fees. If you’re paying estimated taxes, make your fourth-quarter state tax payment by December 31 rather than in January.
If 2005 is looking like a good year for income and your accounting is on a cash basis, you can reduce this year’s taxes by delaying collecting of monies due you until after December 31. For example, if you run tabs for any of your customers, consider giving them an extra month or two to pay for charges between now and year’s end.
TAKE ADVANTAGE OF THE NEW TAX LAWS
The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) created some significant business tax breaks. Whether your restaurant is a corporation, partnership or sole proprietorship, JGTRRA’s incentives affect you.
“JGTRRA opened a number of tax savings possibilities for small businesses,” says Cheryl Pimlott, CPA, tax manager for Rothstein Kass. “But the biggest tax break is the Section 179 deduction, which allows you to deduct the full cost of capital assets in the year of pur-chase up to a defined limit.”
The new law increases the Section 179 Deduction from $25,000 to $100,000. Purchases made right up to December 31 qualify for this huge tax break.
“Bonus depreciation introduced in 2002 allows first year depreciation on the purchase of automobiles of $10,610 for 2005,” says Ginita Wall, CPA, San Diego. “Purchases up to December 31 qualify for bonus depreciation, but only if you use the car 50 percent or more for business.”
Remember that the amount of your deduction depends on your percentage of business use. For example, if you use your car 80% of the time for business, the first-year deduction is limited to $8,488 (80% of $10,610).
In addition to creating opportunities to lower this year’s taxes, JGTRRA makes basic changes that could also affect how you operate your restaurant in the future for tax purposes. For example, the new law may make it worthwhile to reexamine your choice of business entity.
JGTRRA reduces individual marginal tax rates, while keeping corporate rates the same. That change will make partnerships and limited liability companies more attractive. At the same time, a maximum dividend tax rate of 15%, combined with a top corporate rate of 35%, leaves a potential 50% tax on income earned at the corporate level.
If you operate as a sole proprietorship, don’t forget that a self-employed individual may now deduct 100% of health insurance premiums. Now is the time to make sure that you pay everything by year-end.
SAVE MORE FOR RETIREMENT
Make sure that you’re contributing the maximum to your 401(k) or other tax-deferred retirement plan. If not, adjust your savings before year-end. If you are a sole proprietor, open a tax-deferred Simplified Employee Pension (SEP) or Keogh plan by the Dec. 31 deadline.
In recent years, the IRS has increased contribution limits and made it easier than ever to put more money away to fund your retirement years. Except for the new Roth IRA, all contributions to your retirement plan are tax deductible.
“You don’t actually have to make your contributions until you file your return in April of 2006,” says Pimlott, “but you must open the account by December 31 in order to get the tax deduction for 2005.”
SET UP A NEW RETIREMENT PLAN
“If your business has no retirement plan,” says Carol I. Katz, CPA, Baltimore, “you might want to set one up before December 31 to take advantage of the tax credit of 50% of the cost of establishing and/or maintaining the plan. The credit, available for each of the first three years, is limited to $500 per year.” Use IRS Form 8881 for this purpose, but the procedure is tricky, so you will want to consult with your tax advisor before proceeding.
TRIPS THAT COMBINE BUSINESS AND PLEASURE
If you had any trips that combined business and pleasure this year, you can deduct transportation costs and business-related expenses if 50% or more of your time was spent on business.
“Many business travelers don’t keep adequate documentation for travel expenses,” says Rich. “As a result, they risk losing out on deductions.” Documentation for travel and entertainment should include the business purpose and such details as where, when, who you were with and a receipt for any expense over $25.
YOUR PERSONAL CAR FOR BUSINESS
Even if you used your own car for business only on occasion, you may deduct the costs of maintenance and operation for the business-use portion. In figuring your auto expense deduction, you may use either actual expenses or the standard mileage rate. Many tax advisors suggest that you or your accountant figure out your auto deduction both ways and use the method that gives you the biggest deduction.
When you use actual expenses, you deduct the business portion of car expenses including depreciation, gas and oil, insurance, licenses, parking fees, registration fees, repairs, tires, tolls and even garage rent. Under the standard mileage rate for 2005, you may deduct a flat 40.5 cents per business mile, up from 37.5 cents in 2004.
PURCHASES USING BUSINESS LOANS OR CREDIT CARDS
If you bought any capital equipment or supplies on your credit card or with a business loan, you may deduct those purchases this year even if you won’t pay off the loans until later.
BALANCE OUT INVESTMENT GAINS AND LOSSES
By selling appreciated assets and liquidating underperforming investments, you may match gains and losses to minimize your personal income taxes. If you have sufficient losses to offset your gains, you may deduct the losses this year on sales completed by December 31. Note, however, that tax rules limit the amount of capital losses that you can use to offset ordinary income to $3,000.
If your net loss totals more than $3,000, don’t worry. You can carry forward the losses over $3,000 every year until you use them up.
Before the end of the year, make charitable contributions that you would normally make early in 2006. That way, the charity gets the money early and you get a deduction on your personal taxes.
Of course, you can’t rearrange your business affairs to accommodate every twist and turn of the tax laws. Still, whittling down your payment to Uncle Sam is worth the effort. If you can cut just $1,000 off your tax bill each year and invest that money in your tax-deferred retirement account, after 20 years you’ll have added an extra $60,000 to your nest egg. After 30 years, it will be more like $160,000—all because of your year-end efforts.
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