If you own a small business, tax planning should be a year-round event, but many people don’t start thinking about taxes until the year comes to a close.  For the small businessperson, tax planning is often a combination of personal and business planning, because the two are very closely linked.  However, sole proprietors have very different tax considerations than owners of C corporations or partners in a partnership so a careful review is needed to determine what tax planning techniques will best maximize your savings.

Overview

Let’s take a look at some general year-end tax strategies for small business people:

      Accelerating or deferring income.  Corporations can elect to accelerate or defer income and potentially lessen harsh tax consequences. Billing for services or products can be accelerated and payment received before the end of the year. Dividends can be paid before the end of the year or delayed until the next year. Self-employed, cash-basis people can delay billing until late in the year so payments will not be received until next year. Year-end bonuses can be delayed.   Special accounting rules also can help you defer recognition of gain, such as an employee’s taxable fringe benefits.  Research expenditures, charitable contributions, and casualty losses also can help you shift income.  

In 2002, it is conceivable that Congress may lower the corporate tax rates, which would be a big incentive to defer income to next year.  Sole proprietors also may want to defer income especially if they are in the current top tax bracket as, under the 2001 Tax Relief Act, the top individual tax rate steadily falls over the next six years.

      Reviewing your operating status.  S corporations are increasingly attractive, especially after some very tax-friendly court decisions this year.  Start thinking if your small business needs would be met by operating as an S corporation.  Conversion from C to S status can open the door to some favorable tax treatment.  On the other hand, operating as a “traditional” corporation still has many tax-friendly considerations so you need to carefully weigh which status best fits your needs.

      Using net operating losses.  The slowing economy is evident in the growing number of businesses reporting net operating losses.  Remember, the tax rules allow you to carry back and carry forward net operating losses, thereby mitigating some of the pain this year.  Congress may even make the carry back rules more generous and allow you to carry back losses five years.

      Purchasing equipment.  Timing business purchases has very important tax consequences.  Depreciation generally runs on half-year conventions and you’ll need to decide whether to make your purchase in the last months of this year or if deferring these purchases until 2002 will generate more favorable tax treatment.  Small businesses also can “write-off” (expense) up to $24,000 for property placed in service during 2001.  Congress may increase that amount, and make some special allowances for purchases of technology before the new year, so 2001 and 2002 may be a good times to upgrade your computers and software.  

Retirement planning

For the small businessperson, retirement planning also plays an important role in year-end tax planning.  This year, the 2001 Tax Relief Act opened the door for greater participation in more tax-free savings vehicles for many small business owners.  Contribution limits have been raised and with aggressive planning techniques, which meld the benefits available to employees and employers, you can maximize your retirement savings.  If you do not have a retirement plan in place, a new credit will be available starting in 2002, so you may want to defer any action until next year.     

Year-end tax planning is more important than ever before for the small business owner and should begin immediately to take advantage of the 2001 and 2002 tax benefits.  Please contact the office for assistance with your company’s year-end tax planning strategy.