Make the right year-end business moves by getting answers to these tax questions.
What is our current taxable profit or loss? And our projected year-end profit or loss?
These numbers are crucial for your year-end tax planning—and they should be easily accessible to boot. (If they’re not, that’s a sign that you need to tighten up your bookkeeping practices.) If you expect your company to turn a profit for the year, then it’s time to start the hunt for deductions to minimize your tax bill. If you’re going to end up in the red, be sure your loss is legitimate. “Businesses that take excessive or inappropriate deductions in order to reduce their taxable income may run into trouble with the IRS, particularly if they are audited,” says James K. Walker, a CPA with Walker Consulting Group in Glen Allen, Virginia.
Should we buy new equipment this year?
Depending on the way you categorize equipment purchases for tax purposes, you may be eligible for the Section 179 deduction for equipment you buy—and install—in 2008. If you qualify, you can deduct up to $250,000 worth of equipment purchases right away, rather than depreciating it slowly over several years.
Have we properly documented and categorized our entertainment, travel and food expenses?
Deductions for meals, travel and entertainment are a serious red flag for the IRS—particularly if you deduct more (as a percentage of revenue, not a dollar amount) than you have in the past. It’s also crucial to keep track of these expenses, including the meeting’s date, location, business purpose and the business relationship with the person you meet. Your system can be as simple as a pocket expense diary, or as complex as a software program designed specifically to track expenses.
Should we establish a retirement or profit-sharing plan?
Generally speaking, the answer to this question is yes. As long as the plan is established by December 31, you have until the extended due date of your 2008 return to make deductible contributions—thus reducing your company’s taxable income. “The tax deductions can be valuable,” says Tom Scanlon, a CPA with Borgida & Company, P.C. in Manchester, Connecticut. “But also remember that a retirement plan is a good tool for employee recruitment and retention.”
Can we take advantage of any tax credits?
Several business tax credits—including those for energy efficiency improvements—are set to expire at the end of 2008. According to James Walker, many are too small to make a difference. (Of course, if you have already installed qualifying equipment, go ahead and take any credits for which you’re eligible.) However, it’s worth checking out the Work Opportunity Tax Credit, which provides generous tax savings for companies that employ certain disadvantaged workers. Talk with your accountant to see if you qualify.