Tax Tips for Small Businesses

Small businesses can save money come tax time by making a few adjustments before the end of 2006.

Sharon Lloyd, senior tax manager at Moore Stephens Frost in Rogers, said many small business owners are unaware they qualify for certain tax breaks.

Two of the tips Lloyd shared are related to a business’ fixed assets.

The first is an “expense election” that falls under Section 179 of the tax code and allows businesses to do a current deduction for assets that normally would have to be depreciated in value. The maximum amount of assets that can be deducted for 2006 is $108,000, up $3,000 from a year ago.

“Let’s say you buy an asset like a desk,” Lloyd said. “Typically, you have to depreciate that desk, but with a Section 179 deduction, you can expense the desk and all of the fixed assets you’ve purchased up to $108,000.”

The second tip involves what Lloyd called “accelerated depreciation.” She said companies should use modified accelerated cost recovery system (MACRS) to determine the depreciation of an asset. It’s an accelerated method versus the straight-line method and will get business owners a larger deduction earlier in an asset’s life.

Another tip comes into effect at the end of the year and deals strictly with income.

“If it’s a typical high-income year, you want to try to defer your income until next year, if at all possible,” Lloyd said.

Businesses on a cash method should attempt to pay as many invoices as they can before the end of the year or defer billing until the next year. By lowering income, the amount that can be taxed for the year is lowered.

If a company is on the accrual method, it has to claim expenses when it gets an invoice. In that case, the company can delay shipping out products, which also will defer some of its income until the following year.

“The basic summary is, defer your income if you can into the next year, but pay your expenses if you can,” Lloyd said.

Another tip small business owners should look into is to make use of any kind of a deferred compensation plan, such as 401(k)s, IRAs or profit sharing. That can save some on taxes by deferring a portion of income while also benefiting employees in the process.

If the business has only a handful of employees and the owner is considered self-employed, then profit sharing or 401(k) plans may not be feasible. Those companies should look into what’s called SEP (self-employed people) IRAs, according to Lloyd, those can aid in reducing taxable income as well.

Examining how inventory is valued is another tip that can lead to tax breaks. Inventory is what a company produces or purchases for resale and the method used to calculate how much something is valued can be revised.

“That can significantly effect your income,” Lloyd said. “The value of your inventory that’s on your books is valued at the earliest possible amount, so you’ve got to expense more than it actually may be worth.”

Lloyd pointed out that small business owners should find out more about other tax credits such as deductions allowed for research and development expenditures. There also is a credit that allows a self-employed business owner a 100-percent deduction for the cost of health insurance for their entire family.

In addition, if there’s an outstanding debt that doesn’t look like it’s going to be paid any time soon, then write it off as a loss.”