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Year-end tax planning: 7 tax-smart ideas for small business

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in Small Business Tax,Small Business Tax Deduction Strategies

Here are seven popular ways to cut your 2011 business tax bill.  

1. Supersize equipment deductions. The legislation enacted at the end of last year already provides an unprecedented write-off for business owners in 2011.

Strategy: Buy new equipment and place it in service before 2012. Under the 2010 law, you may combine an enhanced Section 179 deduction with “bonus depreciation.”

For 2011, the maximum Section 179 deduction for qualified new or used equipment is a whopping $500,000 and doesn’t begin to phase out until costs reach a $2 million threshold. The bonus depreciation deduction for qualified new (not used) equipment, which was previously set at 50%, increases to 100% for qualified assets acquired and placed in service before Dec. 31, 2012.

Tip: New equipment may qualify for both the Section 179 deduction and 100% bonus depreciation. These two tax breaks are scheduled to be downsized in 2012.

2. Take tax “good” from “bad” debts. As economic doldrums continue, you may have trouble collecting payment for products delivered or services performed earlier in the year.

Strategy: Step up your collection efforts. If you don’t receive payment before 2012, you may be able to deduct the amount as a bad business debt in 2011 if your business uses the accrual method of accounting.

Generally, an accrual-basis business can deduct bad business debts when they become totally or partially worthless. The current deduction must reflect any partial debt previously deducted.

Tip: Keep detailed records of collection attempts to support claims of worthlessness.

3. Ramp up start-up ventures. The tax law provides a special tax break if you’re starting a new business. Instead of taking write-offs over time, you may deduct up to $5,000 of your qualified start-up expenses this year.

Strategy: Open the doors before 2012. To qualify for the fast write-off, you must have commenced operations in 2011.

Deductible start-up expenses are costs that would usually be deducted as business expenses by an ongoing business entity.

Tip: Any remaining start-up expenses above the $5,000 limit must be amortized over 180 months.

4. Review production activities. Under Section 199, a business may be able to claim a special deduction relating to qualified production activities. For 2011, the deduction is generally equal to 9% of the lesser of taxable income from qualified production activities or overall taxable income.

Strategy: Determine if your business qualifies for this write-off. The Section 199 deduction isn’t limited to traditional manufacturers.

For example, construction firms and architects may qualify, but painters generally cannot. It may also be available to businesses that sell, lease or license manufactured goods.  

Tip: The production activities must be performed in “significant part” in the United States.  

5. Maximize inventory benefits. To determine the value of inventory, a business will generally use either the “first in, first out” (FIFO) method or the “last in, first out” (LIFO) method. FIFO assumes that the first goods acquired are the first ones you sell. In contrast, with LIFO the last goods acquired are treated as the first ones sold.

Strategy: Consider a year-end switch to LIFO.

Because you’re basing deductible cost of goods sold at a higher price to your business, your taxable income will be reduced. This can take some of the sting out of a low-income year.

Tip: Proposals in Congress would eliminate or restrict LIFO. Stay tuned.

6. Build up a repairs deduction. There’s a significant tax difference between repairs and capital improvements. Repairs to a business building are currently deductible, while the cost of improvements must be added to the property’s basis and depreciated over a number of years.

Strategy: Authorize minor repairs before 2012.

A repair keeps property in a normal operating condition without adding appreciably to the property’s value or prolonging its useful life. But, an improvement adds to the value of the property, prolongs its useful life or adapts it for a new use.

Tip: The IRS may say that repairs should be lumped in with a capital improvement cost if the repair work is done at the same time as improvement work.

7. Expand corporate gift-giving. A corporation may benefit from enhanced deductions for certain donations to qualified charitable organizations. This includes certain donations of computers, books and food.

Strategy: Have your corporation donate these items before 2012. The tax breaks, which have been extended before, are currently scheduled to expire after 2011.

Alternatively, a corporation may claim an enhanced deduction for property donated for the use of the ill, the needy or infants.  

Tip: Deductions for all corporate gifts to charity are limited to 10% of the taxable income for the year. Any excess may be carried forward.

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