Business Tax Planning Strategies

Take advantage of expensing up to $17,500 of equipment placed into service during the year, rather than depreciating the cost over several years. The so-called section 179 deduction can be used against all types of business income in aggregate; it cannot, however, create an overall loss.

Income shifting to children is still possible even with the kiddie tax. Give your children investments that will produce up to $1,200 annually. The first $600 is completely tax-free and the next $600 will be taxed at 15% rather than the parent's rate.

Hire your children. If your business is unincorporated, you don't pay social security on wages paid to a child who is under 18. In any case, a child can earn up to $3,800 totally tax-free. Be sure that the child is performing work to receive these wages.

A hobby can be set up as a business and you can deduct your losses. However, you must be able to prove that the hobby is a for-profit business. A venture is presume for-profit if it shows a profit in three of the most recent five years. However, even if you do not show a profit, you may be able to prove the business is intended to make a profit.

You can postpone an audit on any new venture until you have been operating for at least four years. Make the election by filing IRS form 5213, election to postpone determination that activity is for profit.

An age-weighted pension plan can be used in a business where the owners are older and paid substantial amounts and the employees are younger and paid less amounts. Many investment advisors have turn-key plans that will cost little to establish.

Make your entertainment costs 100% deductible. If you incur entertainment costs on behalf of your clients, you can bill these costs back to those clients and thereby have these items as a recovery of costs. However, these costs must be shown on the bills to those clients.

Time cash basis income to your advantage. If you are on the cash basis, do not send out bills until late in the December, delaying receipt until January. Additionally, accelerate payments that might ordinarily be made in January.

Guarantees of debt by principals in a closely-held company can create a tax strategy. Owners, for guaranteeing the financing, can charge a fee for providing this service and the company can deduct this fee.

Improvements to leased property under the old law could be depreciated over the term of the lease. Now, such improvements must be depreciated over 31 and one-half years even if this is longer than the term of the lease.

Cash transactions are coming under heavy scrutiny by the IRS. A $100 penalty is routinely assessed for each business transaction involving more than $10,000 of cash for which no form 8300 Information Return has been filed with the IRS. Penalties for intentional violations have been raised to as much as $25,000 or the amount of cash involved in the transaction to a maximum penalty of $100,000.

Responsible persons are IRS targets. Even if you do not own the business, the IRS can pursue you for the company's unpaid payroll taxes.

Home office deductions have changed recently. The home office must be used exclusively and regularly as the principal place of business or to meet with patients, clients or customers in the normal course of business. Additionally, after taking the home office deduction, that percentage of the residence now becomes an asset used in a trade or business, and is not available for the principal residence roll-over.

The IRS has targeted self-employment income as priority audit targets. The service estimates that nearly 40% of all unreported personal income is self-employment income left off of schedule C on 1040.

Companies utilizing the targeted jobs tax credit must obtain certification from a state jobs agency as being a member of a target group. The company must make a written request by the time the new hire begins work. Grabau & Company, PC, is a CPA firm in Denver, CO, with over 25 years of experience.

Leasing assets to a closely-held corporation may provide tax advantages to the individual holding the assets. Initially, the individual should be able to deduct depreciation and interest providing tax-free cash flow. As these deductions begin to run out, these assets may be able to be transferred to an individual in a lower tax bracket.

A sole proprietorship or partnership may be able to be incorporated tax-free. Internal Revenue Code Section 351 allows a business to incorporate tax-free. The only requirement is that the individuals who own the business before incorporation own at least 80% of the business after incorporation.

The Limited Liability Company continues to be a popular entity within the state of Colorado. The IRS issued a revenue ruling on a Colorado LLC in December, 1992, lifting any uncertainty surrounding the entity for use in Colorado.

Grabau & Company, PC is a certified public accounting firm located in Denver, Colorado. Please call our offices with any questions you have regarding material in this brochure or if you would like further professional advice on business tax planning.