With the year nearly over, it makes sense to take the time now to look at your profit (or loss) and take steps to further reduce your taxes. Here's how.
Review your equipment
Purchases: You can deduct up to $105,000 of the cost of equipment that you buy and place in service in 2005. If the equipment must be special– ordered, place the order now so that you can start using it no later than December 31. To take full advantage of this first–year expensing deduction (also called a Section 179 deduction), your taxable income from the business must at least equal your write–off (i.e. you must be profitable to use the deduction).
Idea: Generate cash flow for the business by financing your purchase. Claim your tax write–offs even though you do not pay all or some of the equipment's cost up front.
Alternatively, you can depreciate the property over the recovery period fixed by law –– five or seven years for most equipment.
Dispositions: Get rid of equipment you no longer need or use for tax write–offs. For example, if you abandon or "junk" obsolete equipment, you can deduct any remaining depreciation. Carefully document how you dispose of the property — you must physically abandon the equipment to claim the deduction.
There are three other ways to dispose of equipment. You can sell it, which may produce a gain if the sale price is higher than that of the equipment. You can trade it in when acquiring new equipment. You won't have immediate gain, but the write–offs for the new equipment will be reduced. You can donate it and claim a charitable contribution deduction (the amount of which depends on your basis in the equipment and the organization you donate it to).
Idea: Getting rid of old equipment may also favorably affect your state property taxes. Check with your accountant.
Set up a qualified retirement plan
If you've had a good year, you can sock money away for your retirement while gaining a current tax deduction by using a qualified retirement plan. The type of plan you select determines when it must be set up. Here are the deadlines if you want the plan to be effective for 2005:
- SIMPLE plans: October 1, 2005.
- SEPs: The extended due date of your 2005 return.
- Qualified retirement plans (such as a profit–sharing plan): December 31, 2005.
Idea: You do not have to fund the plan until you file your return.
Review inventory
If items in inventory have declined in value, claim an immediate deduction for the decline. To qualify, you must try to sell the property at the lower value (keep records of your actions to support the deduction).
Weigh dividend distributions
For profitable C corporations, consider paying out dividends to shareholders rather than accumulating the earnings. With the maximum rate on dividends fixed at 15%, there may never be a better time to distribute profits.
Review tax deposits
There is still one estimated tax payment due for 2005. For corporations, the due date is December 15, 2005; for sole proprietors and owners of pass–through entities, it's January 17, 2006. This is your opportunity to reduce previous estimates (which, to the extent they are too high, constitute a tax–free loan to the government) or to increase payments and avoid penalties.
Idea: For owners who owe individual estimated taxes, establish a separate bank account and fund it regularly. This will help you avoid a cash shortfall when the payment due date comes around.
Read more about author and tax expert, Barbara Weltman.
