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If you’re like many busy green industry professionals, you don’t pay much attention to income taxes until the filing deadline looms.
“That can be a costly mistake,” says CPA Tom Normoyle, Huntingdon Valley, Pa. “One of the most effective ways to pare your taxes to the legal minimum is to make tax planning a year-long effort.”
It’s only natural for you to devote most of your management time to developing income and reducing expenses to enhance your bottom line, but it’s important to remember the effect that taxes have on those before-tax dollars. Here are 13 easy tax-planning tips that will help you to maximize your after-tax dollars in 2006 and beyond.
ORGANIZE YOUR RECORDS NOW. Organizing your records early in the year is an effective way to reduce your tax load. “If you scramble at tax time looking for receipts and other records to pass along to your accountant, you’re probably missing out on some healthy deductions,” says Normoyle.
So, start out early this year by setting up folders for expense and income records and file them as they accumulate. By keeping your computer input complete and up-to-date, you’ll make your accountant’s job easier next April; and an easier job for your accountant means a savings on your tax preparation bill as well as your taxes.
LOOK FOR DEDUCTIONS YOU MAY HAVE MISSED LAST YEAR. “Many taxpayers miss out on important deductions by waiting until the last minute,” says CPA Paul Rich, New York, N.Y.. “Among tax benefits easy to overlook are deductions for travel, meals, and entertainment. Most businesspeople do not keep adequate documentation for these expenses. As a result, they lose out on deductions that could provide significant tax relief.”
PURCHASES FINANCED BY LOANS OR CREDIT CARDS. If you plan to make any large purchases on your credit card or with a loan, don’t forget to deduct any interest costs involved.
Use caution when taking advantage of this or any miscellaneous deductions. Document everything. If the IRS decides to question you about any of your deductions, they will want to see all of your pertinent receipts and statements.
TAKE ADVANTAGE OF SECTION 179. Most new business equipment can either be depreciated over its useful life or expensed immediately under Internal Revenue Code Section 179. This provision of the tax law allows you to deduct the full cost of capital assets in the year of purchase up to a maximum of $108,000 for 2006. Consider making any big capital expenditures you’ve been planning before year-end in order to lower this year’s tax bill. Purchases made right up to Dec. 31 will be eligible for the Section 179 tax deduction.
COMBINE PLEASURE TRIPS WITH SOME BUSINESS. If you’re planning any pleasure trips this year, consider adding in a little business. Can you visit a dealer or professional organization in your destination city to discuss management techniques that may help to improve your business practices?
When you travel away from home, you may deduct fares, meals, lodging, and incidental expenses (as long as they are not extravagant). The definition of "away from home" is any trip that takes enough time that the traveler could reasonably be expected to need sleep or rest.
The definition of "home" is your regular place of business. As long as the primary purpose of the trip was business, you can deduct these travel expenses even if you enjoyed some non-business extracurricular activities.
Keep in mind that if more than 50 percent of the time you spend away from home is spent on pleasure, the cost of transportation will be disallowed. However, if more than 50 percent of your time is devoted to business, all travel expenses will be deductible.
MAXIMIZE YOUR TAX-DEFERRED RETIREMENT ACCOUNT EARLY. Make the maximum allowable deposits into your 401(k) or IRA account as early in the year as possible. This is arguably one of the most important tax savings techniques.
“By getting as much money as possible into your retirement account early in the year, you won't have to come up with a huge lump sum at the end of the year,” says Rob Seltzer, CPA, Beverly Hills, Calif., “and you add valuable months to the tax-deferred compounding of your investment.”
WILL YOU MAKE CHARITABLE CONTRIBUTIONS IN 2006? If you plan to make charitable contributions this year, consider donating long-term appreciated securities instead of cash. You’ll receive a full fair market value deduction and pay no capital gains tax on the securities, or sell depreciated securities for the tax-deductible loss and then give the cash from the sale to charity.
BALANCE INVESTMENT GAINS & LOSSES. Keep a close eye on your personal investments during the year. By selling appreciated assets and liquidating under-performing investments, you may match gains and losses to minimize your personal income taxes.
If you have sufficient losses to offset your gains, you may deduct the losses on sales completed by Dec. 31. Note, however, that the amount of capital losses that you can use to offset ordinary income is limited to $3,000.
If your net loss totals more than $3,000, don't worry. You can carry forward the losses over $3,000 every year until you use them up.
DON'T FORGET THAT BLESSED EVENT. If you’re expecting the stork to visit your house this year, remember that you must obtain a Social Security number for babies born any time during 2006, right up to Dec. 31, and put it on your tax return in order to receive the benefits of claiming the child as a dependent or claiming head of household status.
HOME EQUITY INTEREST. If you have a high-interest car loan or a large credit card balance, you should consider taking out a Home Equity Loan to pay them off. You may claim interest payments on up to $100,000 of a Home Equity Loan ($50,000 if you're married and filing separate returns).
SAVING FOR COLLEGE? If you’re facing college tuition expenses in the years ahead, a 529 College Savings Plan can help to build your college fund and save on taxes while you’re doing it.
Offered by 49 states and the District of Columbia, 529 plans allow you to contribute as much as $250,000 to pay for your children’s college. Contributions compound tax-free and withdrawals are tax-free as long as they are spent for higher education. There is no deduction on federal taxes for your contributions, but more than half the states offer a deduction on state income taxes.
CHECK OUT THE NEW ROTH 401(k) PLAN. "Starting in 2006, employers will be allowed to offer the new Roth 401(k) plan,” says Genevia Gee Fulbright, CPA and senior finance adviser for the National Association of Black Accountants.
“The primary differences between the new Roth 401(k) and the traditional 401(k) relate to the tax treatment of plan contributions and distributions,” says Fulbright. “The Roth 401(k) plan contributions are made in after-tax dollars. Your withdrawals are tax-free, just as long as you don't touch the money until retirement.”
The traditional 401(k) plan contributions are made on a pretax basis, which reduces your current taxable income. Keep in mind, however, that withdrawals will be taxed at your regular income tax rate once you retire.
Because there are other factors to consider, Fulbright advises that you consult with a tax and/or financial professional regarding which plan will best suit your business and staff needs.
STREAMLINE YOUR EMPLOYEE BENEFITS PACKAGE. “If you have employees, have your accountant or financial planner do a complete analysis of your employee benefits program to ensure that it meets your specific financial needs while being affordable for the business,” says CPA Bob Klein, Newport Beach, Calif. “The right benefits package can yield substantial income tax savings while protecting, growing, and diversifying the owner's assets. Properly done, it will also hold potential benefits for all employees. The earlier in the year the program is implemented, the greater the potential income tax savings.”
Keeping your annual contribution to Uncle Sam to the legal minimum is the smart way to increase your after-tax dollars. Getting an early start on the task and keeping tax reduction in your plans all year long is a basic requirement for solid dealership management.
William J. Lynott is a retired management consultant and corporate executive who writes on business and financial topics. You can reach him at lynott@verizon.net or through his Web site www.blynott.com.