'Tis the season for procrastination, and Congress isn't the only player waiting until the 11th hour when it comes to taxes. Some small-business owners are scrambling in this last week of the year to try to reduce their tax burden. "Even though Congress failed to extend for 2012 various income tax provisions that expire at the end of 2011, it's still possible to do year-end tax planning now," says author, attorney and small-business advocate Barbara Weltman. Reporting income when you receive it and deducting expenses when you pay them gives you more control over your taxes. Ready to make some very last-minute tax moves that may save you money in 2012? According to Weltman, here are five things you need to know.
1. Don't bill yet for work you're doing now. Typically you'd send an invoice as quickly as possible, but Weltman suggests at this point, for tax purposes, you "consider waiting until the end of the year to send it. This will ensure payment is received in 2012, and taxes on the income are deferred for another year." One caveat, according to Weltman, is if you expect to be subject to the alternative minimum tax (AMT) in 2011. If so, the opposite approach may make more sense -- bill immediately to receive the income in 2011, so "your income will be taxed at no more than 28 percent under the AMT vs. a regular tax rate of up to 35 percent," Weltman says.
Another factor to keep in mind: If you have any concerns about getting paid, it's not worth it to delay invoicing just for the tax benefits. "The sooner you start collections," Weltman says, "the more likely you'll receive all that you're owed."
2. Buy office supplies before the end of the year. Assuming you have the space to store it, try to stock up on the paper, toner or other office supplies you project to use throughout 2012. "Order them now so that the cost is deductible in 2011," Weltman says.
Weltman says an exception to this deduction is prepaid expenses for something that extends beyond the end of next year. For example, if you prepay a three-year subscription to a trade journal or renew a three-year membership to a trade association, that cost is deductible over three years, not just in 2011.
3. Invest in a qualified retirement plan. "If 2011 is expected to be profitable and you don’t yet have a qualified retirement plan, sign the paperwork to establish one for your business before the end of the year," Weltman says. "You'll then have until the extended due date of your return to fund the plan."
Weltman suggests you talk to a brokerage firm, mutual fund or other financial institution about what you need to do to adopt the plan for 2011. Find more information about qualified retirement plans in IRS Publication 560 (while it has not yet been updated for contribution and benefit limits in 2011, the general rules continue to apply).
4. Splurge on equipment. Want an iPad? Need more office computers? Tempted by the after Christmas sales? According to Weltman, if you buy the equipment and start to use it in your business before the end of the year, you can claim a full-write off. The write-off is available whether you finance the purchase in whole or in part. Here's what Weltman says you need to do to get this deduction:
- Use the Section 179 ("expensing") deduction for pre-owned property. This write-off is allowed only if you are profitable. The dollar limit on purchases for 2011 is $500,000.
- Use 100 percent bonus depreciation for new property, whether or not you are profitable. The write-off of the entire cost of eligible property can create or increase a net operating loss, which can mean a refund of some or all of the taxes paid in the prior two years.
5. Settle up your accounts payable. "You may have bills piled up that are not due until 2012 -- if you pay them now, you can deduct the expenses in 2011," says Weltman. If you don’t have the funds in your bank account at the moment, Weltman says you should consider putting the expenses on your business credit card if the vendor or other party allows it. Costs charged to a major credit card before the end of the year are deductible this year even though the credit card bill isn’t due until 2012.
Though you may be tight on time, Weltman says you shouldn't skip one more important step: "Contact your CPA or other tax advisor immediately to discuss whether these or other last-minute actions make sense for your tax situation," she says.