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Tax Savings Tips for the Small Business
Deferring income
Shifting taxable income from the current to the next tax year is
useful only if you expect your next year's income to be equal or
less than your current year's one.
* Waiting for a bonus? Keep waiting. Applies only to
Cash-Basis-Tax-Payers. See if you can receive it in January of
next year. Doing so will exclude the bonus from this year W2 /
1099 (and taxable income) and reduce your taxes for this year.
* Postpone interest income - Transfer money market account
balance (savings), to a Certificate of Deposit. Make sure that
the CD pays interest only at maturity. Interest income generated
by the CD will be taxable only when the CD matures, so you will
still get interest income only it will be taxed next year.
* Selling gaining stocks - Sell gaining stocks (current market
price is higher than your original cost) after January 1st of
next year. There are two exceptions:
1. Exception that Price will decrease - sell now.
2. Own loosing stocks that can offset the gains.
* Converting regular income to long-term capital gain - In
general, gains from selling stocks you hold for 12 months or
more, are subject to a 15% long-term capital gain while gains
from selling stocks you hold less than 12 months are taxed
subject to your highest tax bracket.
Accelerate expenses
Cash-Basis-Tax-Payer will benefit from paying next year expenses
before the end-of-the-year. Those expenses which will be paid
anyways will be deductible this year if paid before December 31.
* Donation - if you are planning to donate cash or property, do
it before December 31.
* Property taxes - pay next year real estate tax before the end
of the year.
* State taxes - pay your state taxes on your capital gains and
business income.
* Medical expenses - do so only if your overall medical expenses
are over 7.5% of your Adjusted Gross Income, otherwise it is not
deductible.
* Employee's unreimbursed expenses - only if they are over 2% of
your Adjusted Gross Income otherwise it is not deductible.
Maximize tax credits
* College / high education tuition - Paying tuition for you or a
dependant? make the payment before the end of the year and
benefit from a credit (note that the credit has very strict
income threshold which causes you to loose the credit) *
Childcare credit - for two working parents (or students), you
can get up to $480 per child. If you have flex plan to cover it
- spend your unused "Flex" balance.
Retirement Planning
There are several retirement plans that allow self employed and
micro business owners to make contributions and achieve both:
1. Tax deductions to offset self employment or business income
2. Financial planning for the future
(SEP) IRA ---------
A simplified employee pension (SEP) IRA allows an employer to
make contributions toward his or her own (if self-employed) or
employees' retirement. Employers can contribute a maximum of 25%
of an employee's eligible compensation or $42,000, whichever is
less.
Self-employed's contribution is based on the net profit from the
business (self employment income and not the gross income).
Per IRS regulations employers must include all eligible
employees who are at least age 21 and have been with a company
for 3 years out of the immediately preceding 5 years.
For calendar year corporations with a March 15, 2006 tax filing
deadline, SEP-IRA contributions must be made by the employer by
the due date of the company's income tax return, including
extensions.
The contributions are deductible for tax year 2005 as if the
contributions had actually been contributed within tax year 2005.
Sole proprietors have until April 15, 2006, or to their
extension deadline, to make their SEP-IRA contribution if they
want a 2005 tax deduction.
Solo 401(k) -----------
Established by the Economic Growth and Tax Relief Reconciliation
Act of 2001, Solo 401(k) plan provides a great tax break to
micro business owners. In addition to the possibility to shelter
from taxes a large portion of income, some Solo 401(k) plans
offer a loan feature for cash-strapped small business owners.
Eligibility for a Solo 401(k) plan is limited to those with a
small business and no employees, or only a spouse as an
employee. This includes independent contractors with earned
income, freelancers, sole proprietors, partnerships, Limited
Liability Companies (LLC) or "S" corporations.
The key benefits of the Solo 401K plan include:
* High limits on contributions: elective salary deferrals and
employer contributions allows sole proprietors to contribute up
to $42,000 ($45,000 if age 50 or older) in tax year 2004, based
on salary deferral plus profit sharing (see below).
* Contributions are fully-tax deductible and are based on
compensation or earned income.
* Assets can be rolled from other plans or IRA's to a Solo 401K.
There is no limit on roll-overs.
* The account holder can take a loan that is tax-free and
penalty free from the Solo 401K, if allowed by the plan, up to
the lesser of 50% or $50,000 of the account balance. The
contribution limits depend on how the business is established.
Overall, the total of deferred salary and profit sharing that
can be put in one of these accounts in one year is limited to
$40,000:
* For businesses that are not incorporated, the salary deferral
and the profit-sharing contributions are based on net earned
income. The maximum contribution limit is calculated based on
salary (max deferral of $12,000) and profit sharing up to the
current max contribution. Contributions are not subject to
federal income tax, but remain subject to self-employment taxes
(SECA). The owner receives a tax deduction for both salary
deferral and employer contributions on IRS Form 1040 at filing
time.
* For corporations, the maximum elective salary deferral amount
for 2003 is 100% of pay up to $12,000 ($14,000 if age 50 or
older). The maximum employer contribution (profit sharing) is
25% of pay, and is based on the W-2 income. It is not subject to
federal income tax or Social Security (FICA) taxes. The salary
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deferral contributions are withheld from your pay and are
excluded from federal income tax but are subject to FICA. The
business receives a tax deduction for both salary deferral and
employer contributions.
Keogh plan ---------
A Keogh plan is a tax-deferred retirement savings plan for
self-employed. In general self-employed individual may
contribute a maximum of $30,000 to a Keogh plan each year, and
deduct that amount from taxable income.
Profit Sharing Keogh -------------------- Annual contributions
are limited to 15% of compensation, but can be changed to as low
as 0% for any year.
Money Purchase Keogh -------------------- Annual contributions
are limited to 25% of compensation but can be as low as 1%, but
once the contribution percentage has been set, it cannot be
changed for the life of the plan.
Paired Keogh ------------ Combines profit sharing and money
purchase plans. Annual contributions limited to 25% but can be
as low as 3%. The part contributed to the money purchase part is
fixed for the life of the plan, but the amount contributed to
the profit sharing part (still subject to the 15% limit) can
change every year.
Taxes are due when the individual begins withdrawing funds from
the plan. Participants in Keogh plans are subject to the same
restrictions on distribution as IRAs, namely distributions
cannot be made without a penalty before age 59 1/2, and
distributions must begin before age 70 1/2.
Setting up a Keogh plan is significantly more involved then
establishing an IRA or SEP-IRA.
Tax USA Inc. ------------
Tax USA, Inc. is a complete tax, accounting and financial
management firm specializes in small businesses, corporations
and high income individuals. Tax USA Inc.'s mission is to exceed
clients' expectation by providing superb tax, accounting &
financial Management services. We offer our clients tax,
accounting and bookkeeping services, CFO Outsourcing, Budget
Review and Business Plans, Cash Flow Management, Payroll
Services and Entities' Incorporation.
Our Clients
We focus on small and mid size businesses, non-profit
organization and high income individuals. Client list comprised
of corporations, non-profit organizations and high-tech
employees. Our corporate clients operate in various industries:
- Security - Information Technology - Internet - Retail -
Manufacturing - Transportation - Real Estate - Project
Management - Business Development
About the author:
ARIK ROZEN, CPA --------------- Mr. Rozen is a certified Public
Accountant; holds a BA in accounting and M.B.A. (majored in
Finance). Mr. Rozen has 15 years of experience in tax, public
accounting and financial management, serving in a range of
executive financial positions and as an independent CPA for
various companies and organizations. Mr. Rozen has specialized
in accounting and taxation of micro and small businesses. In the
past few
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