UpFront - December/January 2007

Plan Now, Save Later

Year-end tax moves you shouldn't miss

by Barbara Weltman

As the final days of 2006 tick by, take time for year-end tax planning. Not only will you face the 2007 tax season in a stronger position, the time you spend can result in big financial rewards. Here are some steps to take now:

Maximizing profits
Shift income and expenses. As long as you report on a cash basis, you have some discretion during the year in which to report income and deduct expenses. Wait until late in the year to bill for completed work, so that payment will be received in 2007. Conversely, pay outstanding bills and make charitable contributions now so they are deductible in 2006.

Declaring dividends. Owners can extract profits at a top personal tax rate of 15 percent. Dividends, while not deductible by your corporation, are not subject to employment taxes—so these payments may be preferable to giving additional compensation to owner-employees.

Paying bonuses. Watch the timing of rewarding your employees with year-end bonuses. If your business is on the accrual basis, you can deduct bonuses declared before the end of 2006 as long as they are paid by March 15, 2007.

Increasing retirement plan contributions. Help employees with retirement savings by contributing to a qualified retirement plan on their behalf. As long as the paperwork is signed by Dec. 31, you can make tax-deductible contributions as late as the extended due date of your 2006 return.

Acquiring equipment and supplies. Before the end of 2006, purchase needed items to nail down a deduction for this year and check for new tax credits. Computers, office furniture, machinery and other equipment placed in service this year can be expensed up to a maximum of $108,000 ($25,000 for SUVs)—and the cost of excess purchases can be depreciated. Supplies purchased by cash-basis businesses can be deducted currently.

Minimizing losses
Take bad debts. If accounts receivables of an accrual-basis business are uncollectible, they are deductible.

Adjusting the final estimated tax payment. Don't overpay this. It can amount to an interest-free loan to the government. Instead, reduce your fourth installment due on Dec. 15. Sole proprietors, partners, limited liability company members and S corporation shareholders who pay estimated tax on business income on personal returns should reduce the fourth installment for 2006, due on Jan. 16, 2007.

Preparing for a refund. If a C corporation has overpaid its estimated taxes for the year, it can request a refund as soon as the year is over. Use IRS Form 4466 for this purpose.

Final word
Gather receipts and other documents necessary for your 2006 return now. Make sure that records for travel and entertainment expenses, a vulnerable area for IRS scrutiny, meet tax law requirements. Schedule an appointment with your accountant or tax adviser to review last-minute steps applicable to your situation. The time you invest now will pay off later.