Business Taxes, unlike personal taxes, refer to the preparation
of tax returns for a variety of business activities including, but not limited to payroll, benefits, income, capital gains, depreciation and other tax issues that are filed by
Effective business tax planning should be a year-round effort. It's never too early to implement strategies to lessen your tax liability for the year ahead. Here are eight ideas that may improve your tax situation:
1. Keep track of business interest expense deductions. Does your business need to borrow to finance growth or expansion or to meet other business needs? If so, you can deduct 100 percent of the trade or business interest expense you incur.
2. Deduct all business account fees. You can deduct all account fees that you pay to your service provider for company retirement plans or other services, as long as the costs are paid for separately by the business.
3. Deduct business equipment purchases. The Jobs and Growth Tax Relief Reconciliation Act of 2003 increases from $25,000 to $100,000 the amount of qualified property that business owners can choose to immediately deduct, rather than depreciate gradually. In addition, the phase-out threshold increases from $200,000 to $400,000 under the new law. These rules apply to property put in service during 2003, as well as 2004 and 2005, and the figures are indexed for inflation after 2003. Qualified property is defined as depreciable, tangible, personal property that is bought for use in the active conduct of your business. Off-the-shelf computer software is now included in the definition of qualified business property. You may also be able to treat monthly lease payments as operating expenses, depending on the type of lease. Whether it's better to buy or lease new equipment depends on factors beyond tax considerations, so make sure to discuss you plans with your business adviser.
4. Establish or contribute more to your company retirement plan. Contributing to a company-sponsored pension or profit-sharing plan can provide you with business tax deductions. The deduction amount can be significant -- up to 25 percent of your eligible participants' compensation, depending on the type of retirement plan, or perhaps even more if you have a defined benefit plan. If you encourage your employees to share in retirement funding through a 401(k) plan or Savings Incentive Match Plan for Employees (SIMPLE), matching contributions you make generally are deductible. To reduce your tax bill, consider maximizing your company's matching contribution to equal statutory limits. If you made contributions in 2003, you'll have to set up a pension or profit-sharing plan by the end of your fiscal year, but once you have a plan in place, you can make contributions as late as your tax-filing date plus extensions. SIMPLE plans can be a very cost-effective way to create business tax deductions, as well as attract and motivate employees. Depending on the positions held by your employees and how they are compensated, in addition to 401(k) or SIMPLE retirement savings programs, there are other plans that would also allow you to contribute up to a few thousand dollars annually and claim a tax deduction in the process. Don't forget to be a participant in your own plan. Using tax-deferred retirement saving plans can help your personal assets grow faster.
5. Change the structure of your business. If your federal business taxes are currently assessed using your individual tax rate, as are unincorporated businesses such as S corporations, partnerships and sole proprietorships, you may be paying more federal taxes than necessary. Currently, the highest marginal income tax rate for individuals is 35 percent. Depending on your business income, changing to C corporation status may reduce taxes on your business profits not taken as salary. As the individual income tax rates were reduced significantly under the Jobs and Growth Tax Relief Reconciliation Act, this may be a good time to review your business structure with your tax adviser.
6. Invest in tax-wise ways. You may be able to manage your business's investable assets in ways that minimize your tax liability. Tax-exempt money market funds and other tax-advantaged investments, such as municipal bonds, may be attractive options for corporate cash reserves. If your business is in a lower tax bracket, however, you may benefit from the taxable returns on CDs, commercial paper, agency securities or taxable money market mutual funds.
7. Take advantage of the dividends-received deduction. C corporations are generally permitted to exclude from their taxable income 70 percent of the dividend income from certain other corporations whose stock they hold. The securities that pay the dividends must be held for at least 45 days.
8. Defer investment income and accelerate deductions. Defer investment income into 2004 and accelerate deductions into 2003. If you are a sole owner, partnership or S corporation that has adopted a cash basis accounting system, you can shift cash from money market funds into short-term discount obligations, such as CDs, that mature next year. You could also delay sending year-end billing notices until 2004, prepay estimated taxes or consolidate business tax deductions into this year. Conversely, if you expect your business to be in a higher tax bracket in 2004, or if you expect to be subject to the Alternative Minimum Tax this year, consider accelerating income in 2003 and deferring deductions until 2004 to lower your tax bill next year.
One last note: Consider matching the maturity dates of your investments with the due dates of your tax payments, so the money is there when you need it. There are a wide variety of short-term securities available, with maturities ranging from a few days to a few months. As always, you should discuss these ideas with your tax adviser.
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Whatever your tax planning need, Shoreline Wealth and Investment Management can assist you in obtaining the best in tax planning advice.
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Charles M. Bloom, Registered Principal offers securities
and advisory services through Centaurus Financial, Inc. - Member FINRA and SIPC - 775 Avenida Pequena, CA, 93111 (mailing address: 3905 State Street Suite 7173, Santa Barbara, CA, 93105) - CA Life Insurance License No. 0A52786 - Centaurus Financial, Inc. and Shoreline Wealth & Investment Management are not affiliated companies.
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