There are year-end business tax strategies that businesses and professionals can take advantage of before December 31, 2011. If your business takes advantage of these tax tips, it may lower your tax bill for 2011. If you expect to make a profit in 2011, this article may be helpful to you. If you expect to take a loss, there are still tips here for you. These tax tips may be particularly helpful for sole proprietorships with just the owner or a couple of employees or one-person LLC's. Always check with your tax accountant at the end of the tax year.
1. Reduce Your Net Income
If your company is in the black with positive net income, that's great. What do you forecast your 2012 income to be? If you forecast it to be less than your 2011 income or about the same, you want to use strategies to reduce 2011 income as much as possible before the end of the year because your tax liability is based on your net income. Most of the tax tips that follow are focused on reducing your net income to lower your taxable income.
The first thing to do is analyze your cash flow. Do you have enough cash flow to do things like prepay your expenses? Buy equipment? Pay your payroll tax? Pay invoices in 2011 instead of 2012. It is always important to have sufficient cash flow for your business and at the end of the tax year, it is particularly important so you can reduce your tax liability in these areas.
If your forecasted 2012 income is substantially more than your 2011 income, then you do not want to defer 2011 income to 2012.
2. Prepay Your Expenses
If your business uses cash-basis accounting, you record your expenses when they occur. That gives you the opportunity to prepay 2012 expenses in 2011. If you have plans for big expenses, go ahead with them now.
For example, if you are starting an advertising program, get started now. If you have office supplies to buy, stock up in 2011. If you are a manufacturer, get repairs made on your equipment before the end of the year. Inventory purchases do not count unless it is obsolete inventory. You can make your payment with cash, check, or credit card and have it count for 2011.
If you use the accrual accounting method, prepaying expenses becomes a bit more complicated. You may be able to write a check with the date before December 31 and pay expenses. However, you might have to prove that the check was cashed and the goods were delivered before the end of the year. This is a good point on which you should check with your tax accountant.
3. Major Equipment Purchase and Depreciation Expense
Do you need to buy any equipment? If you need the deductions for equipment to lower your taxable income in 2011, go ahead and take the Section 179 deduction now. In 2011, you can deduct as much as $500,000 in capital equipment. In 2012, that falls off to $139,000. If you need more than $139,000 in equipment, buy it now if you want to be able to depreciate it in one year. Remember that you can only use the Section 179 deduction if your business was profitable in 2011.
Check out the IRS Publication 946 to get more information about the Section 179 depreciation deduction.
4. Business Vehicle Write-Offs for 2011
If you purchase a vehicle for your business before January 1, 2012 that weighs more than 6,000 pounds, you are buying a significant tax write-off. If you use this vehicle 100% of this vehicle for business, you have a 100% write-off for business under the Section 179 IRS depreciation deduction. But, be careful. You may have to prove to the IRS that you do use the vehicle 100% for business so keep a detailed log in your car. Commuting miles do not count, so it may be difficult to prove that you do indeed use the vehicle 100% for business.
Even if you do not use the vehicle 100% for business, you can calculate the percentage that you do use the vehicle for business; for example, 70%, and take 70% of the cost of the vehicle under the Section 179 depreciation deduction. You still must keep a detailed log in case of an audit.
If you don't want one of these monster vehicles, you can also save if you buy a business vehicle under 6,000 pounds. If the vehicle costs more than $15,300, you can take first-year depreciation of $11,060. If your vehicle costs more than $30,625, you will get an even larger depreciation deduction.
5. Establish a Retirement Plan for Your Business
Even if you are the owner of the business and the only employee, you should establish a business retirement plan as it will lower your taxable income. The plans should be set up by December 31 and you, as an employer, should make your contribution by December 31. If the plan is already set up and it is an IRA plan, then you have until April 17, 2012 to make your contribution.
Excellent plans to set up for a business are the 401(k), the SEP-IRA, the SIMPLE plan, and the Roth IRA. There are more, but these are the best and most common. For my own small business, I use the SEP IRA as it is good for the self-employed.
Contributions to your employees' and your own retirement plans are tax-deductible and will lower your taxable income and your tax liability for 2011.
6. Charitable Contributions
Business charitable contributions are fairly complex so you may want to talk to your accountant before you do your year-end tax planning. Anything you want to donate to charity must be donated by December 31, 2011. There is no extension on this.
You also must donate to an IRS-approved charitable organization. There is a list of those on the IRS website. You can deduct cash, in-kind gifts such as property or equipment, and mileage and travel getting to work at a charitable organization.