Tax Savings News

October 2006

“Now Is The Time”

by Henry Aiy’m Fellman

Greetings my friends.  The fall colors in Colorado have been fantastic and quite a distraction from thinking about business.  I know it’s only October and the end of the year is months away and tax time seems far off in the future. However, now is the time to begin considering year-end tax saving strategies.

This is my inaugural newsletter – the one that I’ve been promising my clients. 

I wish I had $10 for every time I’ve been told, “Next year I’m definitely going to ….” Unfortunately, next year often ends up being the next time taxes are due – which is too late for implementing year-end tax saving strategies. Now is the time to review your tax situation for the current year. Seventy-five percent of the year is behind you and your taxes for 2006 can easily be approximated.

So, I’ve put together some of the year end tax saving strategies you would be wise to consider.  I’ve listed eight items to consider.  I know that these will save you hundreds or possibly thousands of dollars on your taxes.  Some of these thoughts are about your business and some of these are about personal finance.  So, while you are enjoying the fall colors, and watching your favorite team win or lose, set some time aside to go through this information.  Remember, what I say to my clients and present to my seminar students, “Your Business is the #1 Tax Shelter.

I know that many of you have voiced your thoughts about how to increase profitable revenue.  I’ve teamed up with Ted Coffelt, a professional who specializes in growing sales for small businesses and startups. He’s added a brief “Ted’s Sales Growth Tip The Month” to the end of this newsletter.

So, “Now Is The Time” to plan and take action:

Accelerate and Defer Business Income & Expenses:

If you’re in business, a common strategy is to reduce the current year’s taxes by accelerating business expenses and deferring business income. You can accelerate expenses, like supplies, by purchasing items you would have purchased next year before the end of 2006. Similarly, as the end of the year approaches, don’t be so anxious to attempt collecting monies owed you. Wait till the beginning of 2007. However, there are times to employ the exact opposite strategy. For example, if in 2007 you expect to be in a greater income tax bracket than in 2006 you might consider accelerating income and deferring expenses.

Purchase Equipment Before Year End:

Similarly, if you know you will need to purchase equipment, such as a computer, within the next few months, do so prior to the end of the year. By doing this and availing yourself of the Section 179 Deduction election you’ll be able to write off the entire cost of the equipment in 2006 even if you purchased it on December 31st.

Sell Stock before January 1st:

You might be in a situation where you have capital gains from the sale of stock or other property. If so, it might be worth your while to review your portfolio and see if there is any stock or other property you can sell at a loss to offset your gains.

Rollover to a Roth IRA:

Do you have monies in a Traditional IRA or SEP-IRA? If so, consider rolling them over into a Roth IRA. By doing so, although the amount rolled over will be included in your taxable income this year, its future growth will be tax free. This is a particular good strategy to do if you expect your taxable income to be considerably lower than usual. And it’s an awesome strategy if you expect a negative taxable income. The catch is, the rollover MUST happen prior to the New Year. This means, it’s vital to do a tax projection soon.

Setup a Solo 401(K):

As of 2002 the 401(K) retirement plan is available to small business owners. This type of retirement plan allows business owners to sock more money away in a tax saving advantaged retirement plan than is otherwise possible. There are two components to a 401(K): Profit Sharing and Salary Deferral. The Salary Deferral part allows a contribution of up to $20,000 in a particular year (depending on age and salary). In addition, one can elect for the Salary Deferral contribution to go into a Roth 401(K). However, in order to take advantage of this the 401(k) must be set up on or before December 31st of the current year.

Incorporate:

If your business is not already organized as a corporation or LLC now is the time to consider making the change. There are many advantages to being a corporation or LLC however I seldom recommend switching horses in mid-stream. For instance, if part of the year your business is a sole proprietorship and in the middle of the year you start operating as a corporation you will have, for tax purposes, two separate businesses. Each one will need to file a tax return (more money to your tax preparer) and you might create for yourself a major bookkeeping nightmare. Therefore, I usually recommend switching at the beginning of a year unless there is an overriding compelling reason to not wait. However, if you decide to switch to an LLC or corporation now is the time to start the ball rolling. Prior to the New Year you want the new entity setup and ready to go with its own bank account, letterhead and business cards.

Salary:

If your business is already operating as a corporation then it is vital, especially for S-corporate owners, to review the salaries of the shareholder-employees. In particular consider whether the shareholder-employees are being paid a reasonable salary, the proportion of the officers’ salaries to the corporation’s net profit, and the shareholder-employee’s salary as compared to his/her distribution.

Withholding Taxes:

One of the advantages of a business being incorporated is that its owners can reduce the amount of interest-free loan they’re giving to the IRS. We are all required to pre-pay our taxes. Taxes are due April 15th however there are penalties if one does not pay enough of those taxes ahead of time. Shareholder-employees receive a salary from the corporation which is subject to withholding taxes. Since withholding taxes are considered as paid equally throughout the year it is possible to reduce the interest-free loan you are giving the IRS. The trick is to pre-pay your taxes just enough to avoid the Underpayment of Estimated Tax Penalty and to pay it as late as possible. In that way the money is available to work for you. By projecting your 2006 tax liability now you will be able to accomplish this.

Table of the Month:

I’ve listed eight year-end tax saving strategies above.  As you know, there are a lot more. The implementation of the various year end tax reduction program depends on your particular situation. To effectively employ any of these strategies tax planning and forecasting is essential. Now is the time to start you year-end tax reduction planning.  The starting point is computing your projected Taxable Income.  Print this form and enter the figures for 2005 and as much as you can for 2006. 

The first step in deciding which year-end strategies to employ is projecting your Taxable Income. The chart below will enable you to project your taxable income for 2006. Filling in your 2005 amounts from your 2005 tax return will assist you in filling-in the projections for 2006.

Click here to download this form in Word format.

Computing Taxable Income

	2005 Tax Return		Projected 2006
	Form 1040, Line #	Amount
Gross Income:
Salaries & Wages	7	$	$
Interest Income	8a	$	$
Dividend Income	9a	$	$
Taxable State Income Tax Refunds	10	$	$
Business Income/(Loss)	12	$	$
Capital Gains/ (Losses)	13	$	$
Retirement Plan Distributions	15b & 16b	$	$
Rental & K-1 Income	17	$	$
Other Income	11, 14, 18, 19.20, 21	$	$
Total Income	22	$	$
Less: Adjustments to Income	36	$ -	$ -
Adjusted Gross Income	37	$	$
Less: Standard Deduction or Itemized Deduction	40	$ -	$ -
Less: Exemptions	42	$ -	$ -
Taxable Income	43	$	$

 

Growing Your Business - Profitably

Ted’s Sales Growth Tip Of The Month:

     Do you know who your customer is? Are you sure? Do you know which customers are the most profitable?  The companies that intimately know their customer base are the ones who make the most money and can grow their revenue the easiest. If you know the ones who are the most profitable and then you can go find others that look like the highly profitable ones.

     So, take out a piece of paper and write down every customer you have.  If you have many clients, then write down those from the previous day, week or month.  Alongside each client, write down all of the information you can ascertain about them.  This would include such items as: their location, how they found you, how much revenue they generate in a month, how much profit they generate, how much time each client takes per month, etc.  If you provide business to business sales then look at what kind of business your customer is in, how many employees, their estimated sales. 

     Now step back and look carefully at the list. When you do this, you may find that there are certain clients who are quite profitable and others where you just eek by. 

     If you are looking to grow then it is a fairly simple exercise to go find customers that look like the profitable ones. After you acquire the new, profitable, ones, you can gently let the low profitable ones go.

The following is a listing of the tax saving reports for only $3.95 each.

Any one of these reports may contain information that could save you $1,000's.

Keep What You Earn
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