ST. LOUIS (PRWEB) August 10, 2005
Its summertime and youre probably anticipating your upcoming summer vacation.
If you’ve planned accordingly and have done your research, you have already booked the necessities – the flight, the room and a rental car. It’s common sense that if you plan early, you have a better chance of getting luxurious rooms on the beach and Internet airfare specials, plus you have time to hash out all the little details that grant a relaxing vacation. Therefore, I recommend you take these tax tips to heart and relate them to your own business situation.
I’m aware that your annual summer vacation is something you look forward to, therefore, it’s easy to plan months in advance because of the excitement and anticipation. Don’t you wish planning ahead for taxes could be so satisfying? You may just surprise yourself and realize that laying out an organized tax plan for forthcoming years will grant you just as much excitement as the amount of tax savings you’ll receive; ultimately giving you and your business a vacation that will never end. By the time tax day arrives, youll be experiencing the trip of your lifetime.
Start with the Bare Necessities
Tax planning for your business should start with your business structure. Make sure your structure properly reflects your businesses’ needs and the current tax rules. If you are operating as a sole proprietorship, consider establishing a limited liability company (LLC) or a corporate structure. Both will provide some creditor protection. If your company is a C corporation, revisit the benefits of electing S corporation status as individual tax rates have been reduced.
Every business should plan regularly. Make sure that you put together a strategic plan for your business. Taxes and related planning opportunities should be a major part of the plan as taxes can consume up to 50 percent of your profits. Regularly forecast and track business operations for both financial and tax results. At the end of each year, you need to analyze what went well related to revenue and taxes and what requires additional planning.
When it comes to taxes, make sure timing of income and deductions are considered. Some deductions may be prepaid to get a deduction while some income may be deferred to be taxed later.
Evaluate Pros and Cons of Previous Trip
Stop and think about what type of vacation interests you and what you want to get out of your vacation. For example, do you want to experience adventure, relaxation, site-seeing, etc.? You also must factor in work schedule, available vacation time, kids schedules and more. Finally, you should evaluate last year’s trip to determine what should be done differently. Once you consider all of these things, you can organize a well planned vacation.
The same applies to your taxes. You may have done great planning last year, but each year is different and needs to be evaluated accordingly for your business situation. What has changed in your business and how does this affect your taxes? Were you pleased with your prior planning? Was your overall tax rate low enough? What rules have changed?
Get On Board with the Latest Savings
You wouldn’t plan a vacation with last year’s information, and you shouldn’t do your tax or financial planning with last year’s tips either. Each year, there are new deductions and contributions to maximize and new tax savings tips introduced. Keeping up with these each year can make a sizable dent in your tax total.
As your business grows and adds assets, be aware of the ever changing depreciation rules. Although the “bonus” depreciation rules ended in 2004, you can expense up to $ 105,000 of equipment and furniture additions made in 2005. This can be a huge benefit for a family business. The rules also have been changed on the use of vehicles weighing more than 6,000 pounds (such as a Yukon or an Expedition); however, there are still substantial benefits from a tax perspective of using such vehicles, although increasing fuel costs may offset these benefits.
A current opportunity exists related to accelerating certain deductions. The IRS has provided a one time opportunity to elect to deduct certain recurring expenses including insurance, warranty, professional services, service contracts, advertising and real estate taxes plus additional expenses that are prepaid at year end. This opportunity will result in a recurring ability to deduct these items a year earlier than before. This can add up to big savings.
Also, as you do your planning, make sure you know the 2005 contribution limits such as contributions to Keoghs and other retirement plans ($ 42,000), Roth IRAs or traditional IRAs ($ 3,000) and 401(k) plans ($ 14,000). Significant planning could and should be done related to qualified plans.
Unfortunately, one tax trap that is becoming more common is the alternative minimum tax (AMT). As regular tax rates have declined while AMT rates have not, a much larger percentage of taxpayers are in AMT, most of which were never before in AMT.
This makes planning around timing of payment state taxes and the depreciation of certain assets all the more important. It is nearly impossible for a business owner not to take into account the potential of AMT during tax planning.
Dont Forget the Old Stand-bys
Like a favorite resort, there are few tax savings strategies that you should come back to every year.
Although business related meals and entertainment expenses are usually only 50percent deductible, make sure you keep track of all of these expenses as they can add up quickly. In addition, not all meals and entertainment are subject to these rules. Some things such as company outings and holiday parties are 100percent deductible as are employee in-office food and beverage expenses.
In addition to planning to maximize your qualified plan contributions, if you have children, make sure they do the same. Consider having your business hire them so they can earn compensation to contribute to a qualified plan while getting a deduction for your business.
In addition, significant planning should be done related to educational expenses as many planning opportunities exist with the Hope credit, the lifetime learning credit, Coverdell savings accounts, 529 plans and deductible student loan interest. The most popular of these are the 529 plans. Maximize your usage of 529 plans to put away funds for college expenses. Missouri and other states have programs that allow you to save Missouri taxes on the contributions. The earnings are never taxed and allow a tax efficient way to save for educational expenses.
And do not forget your favorite charity. If you have made a large pledge to a charitable organization, consider using appreciated stock to benefit twice. You get a tax deduction for the full value while avoiding paying tax on your built-in gain. And look around the house. Think about doing some summer house cleaning and donate your unused items of furniture, electronics and clothing (or even an old car) and get a tax deduction while helping out the less fortunate.