President Obama’s tax plan will probably pass before Congress recesses for Christmas. The $250K + crowd can once again relax as they glide by in their Lincoln Navigators, splashing mud on the hoi polloi. Nevertheless, those of us who are somewhat closer to the earth (flat on our backs financially speaking, perhaps?) still have a few defensive measures to take, regardless of whether Bush’s tax cuts get extended by Obama and Congress.
Get the money now
In addition to giving a nice boost to your cash flow to help with Christmas shopping, this is also a most clever way to approach clients and entice them to either pay on time, finally make good on a late payment or even request payment a couple of weeks early. You are not chasing money, this is all about tax planning… Your accountant would like you to show X dollars in 2010, for tax purposes. The client will benefit by cleaning up accounts payable as the year ends. That’s how you’ll phrase it when you speak to the finance director and ask that your outstanding invoices, late or early, get paid by 31 December.
Or, take the money later
Did you buck the trend and have an extraordinary year in 2010, but expect less than thrilling billables in 2011? In that case, income deferral is your best strategy. Mail invoices in January and sign contracts that require an up-front payment after the calendar turns.
Pump up the write-offs
If you have a few dollars available, then stock up on office supplies before 31 December. If you have more money, then take advantage of the sales and purchase big-ticket items such as office furniture, a more powerful computer, a good camera, or software that will help you manage business more effectively. For example, the right accounting software will make tax planning and business financial analysis easier. Evaluate whether what you’re using now is sufficient for the needs of your business.
You get to choose how and when the expensive purchases will be written off, either slowly over a period of years as depreciated assets or immediately, by using the Section 179 deduction. You can make that decision at the April 2011 filing. Conversely, if you suspect that you will come up short on deductions next year, shop after the new year.
Review your retirement plan
If you’ve thought about establishing a Solo 401K, do it by 31 December. Add extra dollars to your pre-tax funded and tax-deductible SEP IRA or Solo 401K (if you’re age 50 +, remember the catch-up contribution feature of the latter). Exercise the profit sharing or salary deferral benefits of your Solo 401K if you’ve had a lucrative year and would like to keep some money away from the tax man for a few years.
Review your choice of business entity
Especially if you operate as a Sole Proprietor, try to squeeze in an appointment with a business tax attorney or an accountant, so that your financials can be reviewed and you can talk about where your business is now and what you’d like it to become in the future. Do you envision selling your business, or passing it to a family member? Perhaps you would be better served if you changed your business entity to either an LLC or S Corporation.
2010 Tax Tactics
- The health insurance deduction for Freelancers, including Sole Proprietors, LLC members (single or group), general partners and S Corporations (single or group and owning 2% or more of the stock), will reduce taxes owed on income generated by self-employment and also the amount of self-employment tax owed. Health insurance premiums are 100% tax deductible if one is self-employed and does not participate in a group health insurance plan. Health plan premiums to insure your spouse and dependent children are also fully deductible. However, your business must show a Schedule C profit in order to claim this tax benefit. Businesses that show a loss will not be eligible for this deduction.
- Those launching a new business venture in 2010 will have a more generous start-up expense deduction of $10,000.00 ($5,000.00 is the usual limit). File your registration paperwork toute de suite.
- The Section 179 deduction has been increased to $500K for 2010 (and 2011). Maybe you need commercial property for your business, or a company vehicle or two?
- If you’ve been thinking about hiring an employee and can find someone good within two weeks, a one-time hiring credit can be taken in 2011 for an employee hired by 31 December, 2010. The tax credit will equal 6.2% of wages paid, not to exceed $1000.00, for each employee who is retained for one full year. Your new employee(s) must have been either unemployed for the 60 days that preceded the hire or underemployed, having worked a maximum of 40 hours in the 60 days preceding the hire. Family members hired are ineligible for the new hire tax credit.
Thanks for reading,