Business Tax Planning

Last month in the Ablon Advisor, we discussed what individual taxpayers can do before year-end to help prepare for tax time and reduce their tax burden for 2004.

This month, we'll examine what businesses owners should be doing now if their fiscal year is a calendar year.

1) Ensure your accounting system is accurate and up-to-date. This is not the time to be running behind on your general ledger and accounts payable. Spend extra time reviewing your transactions, and contact us if you have any questions on how to treat specific items.

One of the basic questions you want to determine is whether you expect a profit or loss this year, and whether your business result was due to a one-time event. Your business results, and your future expectations, could affect your tax strategies for 2004.

2) Forecast Q1 purchases and buy early, if possible. You don't want to go on a needless spending spree just to cut taxes -- but if you anticipate making investments for new equipment in early 2006, make those investments in 2005, cash flow permitting. Limits for section 179 deductions will increase to $105,000 in 2005, so you can spend more while staying within deduction limits.

3) Pre-pay ordinary expenses. If you pay taxes on a cash-basis, move payments on regular expenses -- phone bills, etc., -- into December 2005 to increase business expenses this taxable year. Also make purchases now for business supplies you'll use in 2006 -- from paper to binders.

Increasing expenses to reduce taxes may not make sense for every business, however. While it generally makes sense to defer taxes until next year, companies with a loss this year, but with expectations of increased profits next year, may want to bunch payments into 2006. Contact us if you have any questions regarding your particular tax situation.

4. Write off inventory. Depending on your accounting methods, now may be an excellent time to check inventory for damaged or obsolete goods. The decrease in inventory value can provides significant tax savings.

5. Contribute to a Retirement Plan. Pay into your retirement plan or set one up before the year-end to reduce business income for this year; just be sure to check contribution limits of your plan. With some plans, you can set them up in December, but still deduct contributions made until April 15th, 2005. Call us if you have questions, or there are many sources of retirement information online -- but now is the time to start thinking about retirement contributions for 2005.