Year-End Business Tax Checklist

As the end of the year approaches, businesses should use this time to finalize certain actions and initiate new measures that can help to reduce tax liability for this year — as well as for the year to come.

Bonuses

If the company can afford to pay cash bonuses, fix amounts now and determine when they'll be paid. If the business is on the accrual basis for accounting purposes, it can deduct amounts this year as long as bonuses are actually paid within 2–1/2 months of the start of next year. Caution: This rule doesn't cover payments to certain owners.

Charitable contributions

Accrual basis C corporations can authorize charitable contributions (deductible up to 10% of taxable income) and claim the deduction this year as long as it is paid within 2–1/2 months of the close of the year. (Other businesses must make actual payments to claim deductions for donations this year.)

Year-end equipment purchases

If the company needs new computers, machinery or other equipment, action before the end of the year can produce substantial tax write–offs. You may be able to deduct ("expense") up to $102,000 of the cost of such equipment placed in service before December 31. And you may claim 50% bonus depreciation — an added first–year write–off in addition to expensing, while depreciating the balance of the equipment's basis over its remaining recovery period. Result: If you finance the purchase, you may be able to claim large deductions without any immediate cash outlay.

Business cars

If you are considering the purchase or lease of a new business car, new rules make it easier to follow through from a tax perspective.

• If you purchase the car, the first–year dollar limit on depreciation or expensing is $10,610 if the car qualifies for bonus depreciation (i.e., it is new) or $2,960 for pre–owned cars. The dollar limits for light trucks and vans is $300 higher. If a car or truck weighs more than 6,000 pounds but not more than 14,000 pounds, these dollar limits do not apply. However, there is a $25,000 limit on expensing (heavy vehicles purchased before October 23, 2004, can be fully expensed up to $102,000.
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• If you lease the car, the inclusion amount for so–called luxury vehicles (an income item that's added back to help equate the tax treatment of leased cars with purchased cars) has been reduced — no inclusion amount applies to cars first leased in 2004 and valued at $17,500 or less.

Note: There are special tax breaks for certain energy–efficient vehicles: a deduction up to $2,000 for the purchase of a hybrid vehicle (currently the IRS has only certified a handful of cars) and a tax credit up to $4,000 for the purchase of a wholly–electric vehicle.

Retirement plans

If the business doesn't have a qualified retirement plan, consider setting one up before December 31. As long as the papers are signed by this date, contributions to the plan generally can be made as late as the due date of your return (including extensions).
Bonus: There's a small business tax credit for setting up a plan — a maximum $500 credit per year for the first three years of the plan. For rules on retirement plans for small business, see IRS Publication 560.

Health coverage

Make plans now to handle double–digit premium increases expected for next year. Negotiate with the insurer to keep premiums down as much as possible and/or consider shifting some or all of the cost to employees (the business can take steps to enable employees to pay their share on a pre–tax basis).

Other employee benefit plans

If the business can afford to pay for education, dependent care, and certain other personal costs of employees, review plan requirements for tax savings. Also look into options for plans that don't cost the company anything but that enable employees to pay for personal expenses on a pre–tax basis (such as plans for certain monthly transit passes).

Strategic planning

Now is a good time to review where the business stands and what can be done to improve your bottom line in the year to come.

Accounting methods

Review with an accountant your current method and whether it is advisable to make a change (if it's permitted). New rules make it easy for certain small inventoried–based businesses to switch to the cash method of accounting, a move that simplifies record–keeping.

Distributions

If the business had a good year, decide whether to distribute earnings or accumulate them for future expansion or other purposes. If distributions are to be made, decide how to do so on a tax–advantaged basis. Remember that corporate dividends are now taxed to shareholders at no more than 15%.

Evaluate your business organization

The legal way in which your business is organized may no longer suit your needs. For example, if you're a sole proprietor, you may wish to incorporate or form a limited liability company to gain personal liability protection. Discuss your options with an attorney.

© 2003 Barbara Weltman. Visit her Web site.