There's Still Time For Year-End Tax Planning
As we enter the gift-giving season, we need to start thinking about giving ourselves the nicest gift of all this year: a lower tax bill. Of course, with the current recession facing our economy, saving money on taxes may the last thing on most of our minds, as we're faced with higher unemployment and the uncertainties of the current terrorist war. However, some simple tax planning ideas now may very well spare us the extra aspirin we may need to take come April 15th.
Check Your Tax Payments
To begin with, you will have to sit down and analyze your current income situation in comparison with last years. Did you make more income or less income? How much was your total tax liability including estimated income tax payments? The current tax laws require you to have 100% of last year's income taxes paid or estimated in by January 15, or 90% of the current year's liability. This means Uncle Sam wants your money in advance, period. You will need to make sure you have enough taxes paid in to avoid any late payment penalties, without making Uncle Sam an interest-free loan. If you think you might be overpaid, consider skipping the last estimated tax payment, or adjusting your payroll withholding. If you think you are underpaid, adjust your last estimated tax payment to cover the additional taxes due. As long as enough taxes are paid in by January 15th, you are safe.
Review Your Income and Deductions
The tax rates fluxuate frequenty so it is advisable to review your situation with your tax advisor. You may find that accelerating your deductions or postponing (deferring) income will be of benefit to you. If you have any year-end bonuses, defer those until the new year . Any large accounts receivable to collect for business owners on a cash basis you may want to postpone until next year as well. The last month of the year is the time to schedule your income. After December 31st, it will be too late.
Take Full Take Advantage of Employee Benefits
Accelerating deductions into 401(k) plans, SEP and profit-sharing/pension plans are excellent deductions. These are wonderful tax shelters that allow you to reserve savings for your retirement, which Uncle Sam always encourages. You still have until April 15th to contribute to your IRA account for 2001, but every advantage should be taken in putting money aside for old age and saving taxes.
Review Your Portfolio
If you own stocks, bonds or mutual funds that have declined in value, consider selling them for a loss and replacing them with similar securities. This is called a "swap". But be careful not to swap for an "identical" security within thirty days, or your loss will be disallowed under the wash sale rules.
Measure your gains in the market and offset them with any losses you may have. Many people are shocked when they had excess short-term losses over gains, and were only allowed to write off $3,000 per year of those losses as personal rather than investment loss.
A limited amount of net capital losses may be used to offset other income, including salary, interest, dividends, investment income, partnership and Sub-S income. If you want to take even larger losses, consider selling some of your profitable holdings. You may use these gains to offset your investment losses, and avoid the capital loss limitations.
Save Your Lottery Tickets
With so many people sneaking off to the riverboat last year, computing and planning to offset your gaming winnings with your losses is definitely a good idea. Gambling losses are deductible to the extent of gambling winnings, but only if you itemize. Saving losing lottery tickets is a good way to offset those gambling winnings. Start saving and gathering those now, not on April 15th. You are required to report all of your gaming and gambling winnings. Above certain limits, the casinos or state lottery commissions are required to report your winnings to the IRS. When your return is processed, the IRS computers will match the income reported on your tax return to that reported by third parties. If there are discrepancies, you'II get a love letter from Uncle Sam.
Deducting Your Points
If you recently purchased or refinanced your home mortgage, you may be entitled to deduct your "points" or prepaid interest. Points on a home loan to purchase a new residence are deducted in the year paid if you itemize your deductions. If you do not have enough deductible expenses to itemize deductions, you may amortize those over the period of the loan, so that the points deduction won't be lost.
Every trade or business must file information returns (Forms 1098 and 1099) for each year that certain payments are made to non-corporate recipients. A Form 1099 is generally not needed for payments to corporate vendors other than attorneys and corporations providing medical and health care services.
The two most common information returns for most small businesses are Forms 1099-INT and 1099-MISC. Interest paid in the course of a trade or business is reported on 1099-INT when the amount paid totals $600 or more to any payee. The 1099-MISC is used to report payments of rents or services of $600 or more in any one year to a payee.
Typical payees for whom you might need a 1099 would be cleaning services, contractors, consultants, landlords, and professional services. Most small businesses have at least one or more non-employees to whom they have paid $600 or more during the year.
Failure to file returns or to include correct information can result in a fine of up to $50 per information return to a maximum of $100,000 for a small business.
Information returns are to be given to payees by January 31 and the IRS copies are to be mailed to them by February 28. The IRS due date is extended to April for electronically filed returns.
There are many ways to make your business more profitable, and sound credit policies are high on the list. The recent slowdown in the economy is a good reason to reexamine your company's policies. Keep the following items in mind as you review your policies:
- Don't be so eager to sign on new customers that you neglect to check out their credit history. Take the time to check references, and obtain a credit report to see how they've handled other financial transactions.
- Establish collection policies and follow up promptly on delinquent accounts. The more overdue accounts become, the more likely they are to become uncollectable. That cuts into your profits.
- Calculate what it costs to carry credit for your customers. For example, if your business generates $1,000 per day in credit sales, and it takes you an average of 60 days to collect, your cost of providing credit to your customers is $6,000 per year. This example assumes you can borrow money at 10% interest. By speeding up the average collection to 30 days, you cut your carrying costs by half.
- To speed collections, invoice customers when you ship the goods, don't wait until the end of the month. Make sure your invoice clearly shows your payment terms, including penalties for late payment and the discount, if any, for prompt payment.
- Be aware of the payment cycles for your industry. For example, if contractors typically pay their bills by the 10th of the month, make sure your invoices arrive in plenty of time for them to process your payment.
Sound credit policies and adhering to those policies enhance your chances for business survival, especially when the economy slows down. Call us to review your policies or to set policies in place to help make your business more profitable.
Employers: Amend Your Retirement Plan Before Year End
If your company has a retirement plan, an important deadline is approaching. By the end of the 2001 plan year, you must amend your qualified retirement plan to comply with various tax law changes that have taken place since 1994. This includes all qualified plans, such as 401(k), pension plans, and profit sharing plans.
If your plan is not revised as required, it will lose its "qualified" status (all of its tax benefits). This could result in the retroactive taxation of plan earnings, the loss of deductions for your plan contributions, and the loss of tax-favored benefits for your employees. Also, rollovers from your plan to IRAs and other plans could be retroactively disallowed.
Many small businesses have a "prototype plan" sponsored by a bank, insurance company, or other financial institution. If this is the case for your company, you may simply have to fill out and return an amendment form provided by your plan sponsor.
Don't assume you'll automatically receive a form in the mail. Perhaps you've moved your plan assets, or your original sponsor has merged with another company. If your amendment papers haven't arrived, contact your current plan sponsor about their status.
Make amending your plan a high priority. Contact us or your plan sponsor for details.