Tax Tips for Small Business Owners
Donate appreciated securities to charity
Instead of donating cash, consider bequeathing appreciated securities, suggests Michael Solomon, partner in charge of the tax department at Goldenberg Rosenthal, LLP, in Jenkintown, PA. “If you have stocks or mutual funds that have substantially appreciated and you have owned them for more than a year, you can donate them and get a deduction equal to the full fair market value and never be liable for tax on the appreciation.”
Qualified dividend income tax reductions
If you are in the high-income tax bracket and own a privately held business, or are an executive who receives additional money based on corporate profits, consider taking your cash in dividends rather than a year-end bonus. “Currently, dividend payouts are taxed at 15 percent, which is considerably lower than the typical income tax rate of 35 percent for high-wage earners,” says Solomon.
Avoid the Alternative Minimum Tax (AMT)
The number of people who will be affected by this tax is expected to grow to more than 34 million in 2010, according to the IRS. Solomon suggests preparing a tax projection to see if you can prevent paying the AMT this year. “You may want to defer paying real estate taxes or making state and local estimated tax payments until 2009, even if it causes late payment penalties, to keep yourself from falling into the AMT trap.”
Retirement plan start-ups
In order to stimulate greater retirement saving, small employers who establish new retirement plans are now entitled to a tax credit. This is one of a few notable tax law changes for the 2007 filing season that can put more money in your business checkbook, says Keith Hall, national tax advisor for the National Association for the Self-Employed (NASE). The credit is only available to bosses with 100 employees or less who have not maintained a qualified retirement plan during the three-year period prior to the first effective year of the plan. The credit amounts to 50 percent of the cost incurred in creating or maintaining a new plan, up to $500 in each of the three years the plan is effective. If you want to take advantage of this perk, don’t put it off. It’s scheduled to expire for tax years beginning after 2010.
Self-employment tax contribution base increased
The maximum amount of self-employment income subject to Social Security taxes increased from $94,200 to $97,500. The self-employment tax rate remains 15.3 percent.
Business standard mileage rate increased
The standard business mileage rate increased from 44.5 cents per mile to 48.5 cents for miles driven for business. Remember that you can deduct the cost of parking and tolls in addition to the mileage allowance.
Health insurance adjustments
“Many small businesses overlook the ability to directly deduct health insurance as an adjustment from income, and will deduct it as an itemized deduction which must exceed 7 ½ percent of their adjusted gross income,” says Karla Dennis, CEO of Cohesive, a Cypress, CA-based tax firm. Not only can they deduct their insurance, they can deduct their spouses insurance as well.
Business or entity structure
Find out if your business is properly structured for you to pay the minimal amount of taxes. “In 2006, a client changed his entity structure from sole proprietorship to an S-corporation and reduced the tax liability by $7,600,” says Dennis.
SBR Resources:
To learn more about tax issues that could impact your finances, see the following Small Business Review articles:
A Primer on 1031 Exchanges
By plowing proceeds of a property sale into a new building, you can defer taxes. Here’s how.
Tax Strategy to Eliminate Barrier To Growth
The 1031 exchange can be used to defer taxes on the sale of many kinds of assets.
The Tax Gap: Feds Target Small Businesses
A raft of proposals could cause a sea of paperwork.
A Gift From Uncle Sam
The Roth 401(k) can be a boon to business owners.
Beware, The Contractor Trap
Independent contractors can give you flexibility and save you money, but there are risks. How not to get burned.
Uncle Sam Wants Small Businesses
Small business audits are on the rise: How to survive the IRS.
Defined Benefit Plans Offer Numerous Perks
Consider a defined benefit plan if you’d like to alleviate some of your company’s tax burden— and fuel retirement savings for yourself and your employees.
