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 December 3, 1999

Year-end tax tips can save you big bucks

Whether your business plans are to become the next big Internet start-up or simply to supplement your day job, some year-end tax planning can improve your business’s bottom line.

According to the Colorado Society of CPAs, the last quarter of the year is an especially important time to take advantage of tax-saving strategies. Here are a few thoughts to get you started:

* Retiring-mindedness

Funding a retirement plan is one of the best strategies small-business owners can use to lower taxable income. Money contributed to a qualified retirement plan is tax-deductible and grows tax-deferred until it is withdrawn. A Keogh, SEP, or SIMPLE plan allows you to put away more on a tax-deductible basis than you can under an IRA. But remember, unlike IRAs, which can be opened until the date you file your return, the others can not be — a Keogh plan needs to be opened before year-end, and the deadline for setting up and contributing to a SEP plan is the due date for your return, including extensions.

* Expensed expenses

Normally, the cost of capital equipment – equipment that has a useful life of more than one year – must be deducted over a number of years. There is one major exception. Businesses that purchase new business equipment can elect to deduct immediately up to $19,000 worth of equipment in 1999 rather than recovering its cost over a period of years through depreciation deductions. This deduction begins to be reduced dollar-for-dollar once the cost of business property placed in service during the tax year exceeds $200,000.

* Charitable giving

As a sole proprietor or partner, you can make cash gifts to charity of up to 50 percent of your adjusted gross income (AGI) and of appreciated long-term capital-gain property up to 30 percent of AGI. What’s more, when you donate appreciated property, you not only get a deduction, but you also don’t owe any capital gains taxes. Another way to be charitable and earn a tax deduction is to donate excess inventory. The deduction for charitable contributions made by C corporations, though, is limited to 10 percent of modified taxable income.

* Timing

Self-employed workers — including employees with sideline businesses — who use the cash method of accounting can cut their tax bills by accelerating expenses and deferring income. One way to defer income is to mail your invoices at the end of December so you won’t get paid until next year. On the expenses side, you may want to evaluate future equipment, furniture and office supply needs and consider purchasing those items before year-end.

* Family employment

If you need to hire employees for your business, consider employing family members. Doing so allows you to shift income to individuals in lower tax brackets, as long as they provide bona fide services to the business. If your business is a sole proprietorship, payments for the services of your child under 18 also are not subject to Social Security taxes.

* Bad debts

If your business uses the accrual method of accounting, you should review your outstanding accounts receivable to determine whether any of them are uncollectible. Under current law, each individual bad debt must be identified and deducted in the year in which it becomes partly or totally worthless. It’s a good idea to keep a paper trail showing that you took reasonable steps to collect the money due you.

* Entertainment

Qualified business entertainment includes taking a client to dinner, a show, or sports event or just inviting a few of your customers to your home for pizza. Tax law allows you to deduct 50 percent of meals and entertainment expenses that are business-related. To qualify, you must be able to show that the expense directly preceded or followed a substantial, bona fide business discussion or that it is directly related to the active conduct of your trade or business. You must keep good records, which must include a receipt for any expenditure of $75 or more.

Holiday parties, picnics, and other social events you put on for your employees and their families are an exception to the 50-percent rule. Such events are 100 percent deductible.

* The home-office deduction

More people will qualify for the home-office deduction in 1999. Under previous law, unless you met with clients, customers or patients on a regular basis in your home office, you could not claim the deduction. The new law drops this requirement and, generally, qualifies taxpayers who perform services outside the home for the home-office deduction as long as they use their offices for administrative or management activities.

* Borrowing costs

When your business borrows funds, you can deduct 100 percent of business interest expenses. If you use a credit card for your business, you are eligible to deduct the business portion of credit card fees and finance charges as well.

Many small-business owners pass up legitimate tax-savings opportunities because they are concerned about triggering an audit. CPAs say that as long as you comply with the rules and make certain your deductions are accurate, you owe it to yourself and your business to make the most of tax-saving entitlements.

This article was submitted by the Colorado Society of Certified Public Accountants. Call 1-800-523-9082 for the CPA referral service or go to www.cocpa.org.

Whether your business plans are to become the next big Internet start-up or simply to supplement your day job, some year-end tax planning can improve your business’s bottom line.

According to the Colorado Society of CPAs, the last quarter of the year is an especially important time to take advantage of tax-saving strategies. Here are a few thoughts to get you started:

* Retiring-mindedness

Funding a retirement plan is one of the best strategies small-business owners can use to lower taxable income. Money contributed to a qualified retirement plan is tax-deductible and grows tax-deferred until it is withdrawn. A Keogh, SEP,…

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