Year-End Tax Planning
If you own a business you can
still take several measures at the end of this year to
reduce your 2010 tax burden. Here's a rundown of best
The Section 179 deduction for
equipment purchases was increased again in 2010 under
the recent passage of the Small Business Jobs Act of 2010.
You can elect to expense (deduct
immediately) the cost of most new equipment up to $500,000
(subject to a dollar-for-dollar reduction in that $500,000 for
purchases over $2,000,000).
Further, you can take bonus
depreciation of 50% on the amount of capital expenditures
in excess of $2,000,000, and then take normal depreciation on
Many states have not matched these amounts and, therefore,
state tax may not allow for the maximum federal deduction.
In this case, two sets of depreciation records will be needed
to track the federal and state tax impact.
Timing. If you plan to
purchase business equipment this year, consider the timing.
You might be able to increase your tax benefit if you buy
equipment at the right time. Here's a simplified explanation:
Conventions. The tax
rules for depreciation include "conventions" (rules) for
determining how many months of depreciation you can claim. The
conventions that come into play with equipment are...
convention: When the half-year convention applies, all
property that you begin using during the year is treated as
"placed in service" at the midpoint of the year. This means
that no matter when you begin using the property, you treat it
as if you began using it in the middle of the year.
Example: You buy a $40,000 piece of machinery on
December 15. If the half-year convention applies, you
get one-half year of depreciation on that
convention: The mid-quarter convention must be used if
the cost of equipment placed in service during the last three
months of the tax year is more than 40% of the total cost of
all property placed in service for the entire year. If the
mid-quarter convention applies, the half-year rule is out the
window, and you treat all equipment placed in service during
the year as if it were placed in service at the midpoint of
the quarter in which you began using it.
Don't forget to tell us
about any equipment purchases you're planning. As
your Accountant we can examine the timing of these
purchases so you take full advantage of these tax rules
Partnership or S
Corporation Basis. Partners or S corporation
shareholders in entities that have a loss for 2010 can deduct
that loss only up to their basis in the entity. However, they
can take steps to increase their basis to allow a larger
deduction. Basis in the entity can be increased by lending the
entity money or making a capital contribution by the end of
the entity's tax year.
Caution: Remember that
by increasing basis, you're putting more of your funds at
risk. Consider whether the loss signals further troubles
Retirement Plans. Self-employeds who have not yet done
so should set up self-employed retirement plans before the end
Dividends you cause your corporation to pay qualify for the
reduced 15% (or 5%) rate in the hands of stockholders,
including you as a stockholder. Such a dividend may reduce the
risk of a tax on accumulated corporate earnings.
Budgets. The need for a business budget may seem
obvious - but many companies overlook this critical business
planning tool. A budget is extremely effective in making sure
a business has adequate cash flow and, thus, in ensuring a
business's financial success. That's why every business, from
the smallest to the largest, should have a budget.
Once the budget has been
created, then monthly actual revenue amounts can be compared
to monthly budgeted amounts. If actual revenues fall short of
budgeted revenues, expenses must generally be cut. For more on
this topic, see the article below about common budgeting
Tip: Each year-end, business owners should get together with
their accountants to budget revenues and expenses for the
Consult Us First at
These are just a few of the year-end planning tax moves
that could make a substantial difference in your tax
bill for 2010. But be careful about acting on these
suggestions without consulting us first. They are
general in nature, and your specific tax or financial
situation may require special planning.
As always you can call our offices if you have any
questions about these or any other accounting related issues, at 301-657-8080.
Regards, Paul Sullivan, CPA