Tax Tips

If you're inclined to let your accountant do all the worrying about your business and personal income taxes, you could be making a costly mistake. Your accountant may be the tax expert, but no one knows the fine details of your finances as well as you do. That's why your accountant needs your help to hold your income taxes to a minimum.

Here are some steps you can take now to slash your 2003 tax bill:

Accelerate Payments and Defer Income

Tax experts agree that accelerating payment of bills and deferring income wherever possible are among the most effective ways for you to reduce current-year taxes.

Pre-pay as many of your business-related bills as possible by December 31. Prepaying your rent and anticipating supply needs are often overlooked ways to reduce current year's taxes.

Consider buying your first three months of medical and office supplies for next year before December 31. Also, pay any outstanding bills before year-end. If you make the purchases on your credit cards, the IRS allows you to take the deduction in the year of the charge; you don't have to wait until you pay the bill to take the deduction.

Other expenses that lend themselves to pre-payment are state and local taxes and professional fees. If you're paying estimated taxes, make your fourth-quarter state tax payment by December 31 rather than in January.

Before the end of the year, make charitable contributions that you would normally make early in 2004. That way, the charity gets the money early and you get a tax deduction.

Rich also suggests that you donate unused business equipment to a nonprofit organization before the end of the year. Be sure to get a receipt and an estimate of the fair market value of the goods you donate. If you're audited, no receipt means no deduction.

Note that 2003 is the last year that a business can take an increased deduction for donating used computer equipment to a school or library. Instead of throwing the old equipment out, you can donate it and take a deduction equal to its cost basis, plus one-half of its fair market value.

If 2003 has been a good year for income and your accounting is on a cash basis, you can reduce this year's taxes by delaying collecting of accounts receivable until after December 31.

However, if you expect abnormally high income or a change in marital status or state residency next year, your marginal tax rate could actually increase despite the general reduction in rates. If so, consider reversing the above process by bringing in that extra income now and putting off deductions until next year.

Take Advantage of the New Tax Laws

The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), signed by the President on May 28, creates some significant business tax breaks. Whether you structured your practice as a PC, partnership, S corporation, or sole proprietorship, JGTRRA's incentives affect you. All of the provisions affecting businesses are effective retroactively, either to January 1, 2003, or to May 6, 2003.

JGTRRA has opened up a number of tax savings possibilities. But the biggest business tax break is the Section 179 deduction which allows you to take an immediate per year depreciation deduction on the cost of new and used assets purchased from now until 2005.

The new law increases the Section 179 Deduction from $25,000 to $100,000. Purchases made right up to December 31 qualify for this huge 2003 tax break. In addition, off-the-shelf computer software is eligible for the Section 179 deduction for the first time.

Bonus depreciation, introduced in 2002, increased the maximum first year depreciation on luxury automobiles to $10,710 from $7,660 effective May 6, 2003. Purchases up to December 31 qualify for bonus depreciation, but only if you use the car 50 percent or more for business.

Remember that the maximum deduction is based on your percentage of business use. For example, if you use your car 80% of the time for business, the first-year deduction is limited to $8,568 (80% of $10,710).

In addition to creating opportunities to lower this year's taxes, JGTRRA makes basic changes that could also affect how you operate your practice in the future for tax purposes. For example, the new law may make it worthwhile to reexamine your choice of business entity.

JGTRRA reduces individual marginal tax rates, while keeping corporate rates the same. That change will tend to make partnerships and limited liability practices more attractive. At the same time, a maximum dividend tax rate of 15 percent combined with a top corporate rate of 35 percent leaves a potential 50 percent tax on income earned at the corporate level.

If you're self-employed, don't forget that this is the first year a self-employed individual can deduct 100% of health insurance premiums. Now is the time to make sure that you pay everything by year-end.

While the new tax laws have incorporated many tax breaks for business, they are now more complicated than ever. Consult with his or her tax advisor to determine how to take maximum advantage of the changes.

Save More For Retirement

Make sure that you're contributing the maximum to your 401(k) or other tax-deferred retirement plan. If not, adjust your savings before year-end. If you're self-employed, open a tax-deferred Simplified Employee Pension (SEP) or Keogh plan by the Dec. 31 deadline.

In recent years, the IRS has increased contribution limits and made it easier than ever to put more money away to fund your retirement years. Except for the new Roth IRA, all contributions to your retirement plan are tax deductible in the tax year they are contributed.

You don't actually have to make your contributions until you file your return in April of 2004, but you must open the account by December 31st in order to get the tax deduction for 2003.

Set Up a New Retirement Plan

If your practice has no retirement plan, you might want to set one up before December 31 to take advantage of the tax credit of 50% of the cost of establishing and/or maintaining the plan. The credit, available for each of the first 3 years, is limited to $500 per year. Use IRS Form 8881 for this purpose, but the procedure is tricky so you will want to consult with your tax advisor before proceeding.

Trips That Combine Business and Pleasure

Did you make any trips that combined business and pleasure this year? If more than half of your time was devoted to business, you can deduct transportation costs as well as all directly business-related expenses. If more than 50 percent of your time was spent on pleasure, the cost of transportation will be disallowed.

Of course, if the trip was entirely for business purposes, such as attendance at a business seminar (related to your current practice)or a medical convention, all expenses associated with the trip may be chalked up to business expense.

"Many business travelers don't keep adequate documentation for travel expenses," says Rich. "As a result, they risk losing out on deductions." Documentation for travel and entertainment should include the business purpose and such details as where, when, who you were with, and a receipt for any expense over $25.

Use of Your Personal Car For Business

Even if you used your personal car for business only on occasion, you may deduct the costs of maintenance and operation for the business-use portion.

In figuring your auto expense deduction, you may use either actual expenses or the standard mileage rate. Many tax advisors suggest that you or your accountant figure out your auto deduction both ways and use the method that gives you the biggest deduction.

When you use actual expenses, you deduct the business portion of car expenses including depreciation, gas and oil, insurance, licenses, parking fees, registration fees, repairs, tires, tolls, and even garage rent.

Under the standard mileage rate for 2003, you may deduct a flat 36 cents per business mile (down from 36.5 cents per mile in 2002).

Purchases Financed By Business Loans or Credit Cards

If you bought any business equipment or supplies on your credit card or with a business loan, you may deduct those purchases this year even if you won't pay off the loans until later. While you're at it, don't forget to deduct any interest costs on the loans themselves.

Balance Out Investment Gains and Losses

This has been a volatile year for investments. Some did poorly while others rebounded nicely. By selling appreciated assets and liquidating under-performing investments, you may match gains and losses to minimize your personal income taxes.

Tax Tips