Now that we’re approaching the the mid-way point of 2012, it’s the perfect time to review the financial and tax picture of your business. Too often small business owners wait until it’s time to file their returns to start thinking about taxes. Have you ever met with a CPA or tax preparer and been told you could have lowered your tax payments if only you had acted earlier?
Tax planning is an ongoing process and taking actions now can help lower your 2011 taxes, and for years to come. Here is a small business mid-year tax planning checklist for you to consider:
1. Meet with your CPA
Why wait until the busy tax season to meet with your CPA or tax advisor? Make a mid-year appointment when you’ll both have more time to discuss your financials. Most importantly, you’ll still have plenty of time to act on his or her suggestions within 2011.
2. Review your estimated tax payments for 2011
Now that we’ve hit the midway point, review what your business has made year to date and your forecast for the rest of the year. Then assess your estimated tax payments to avoid underpayment penalties or overpayments (you could be doing more with that money). Adjust your final two estimated tax payments for 2011 as needed.
3. Re-evaluate your business entity
Many small businesses start out as a sole proprietorship or a partnership, but then eventually transition to another entity. For example, if your business is not incorporated, you may want to consider incorporating your business or forming an LLC to shelter you from some financial risk and possibly save money on taxes. Sometimes an entity is formed with one income target in mind, and you might need to reconsider the entity for a different income level. Failing to adjust your business entity for your revenue can be a costly mistake. Discuss the different legal entities with your CPA, so you can determine the right entity for your situation and the right time to make the change.
4. Review your salary and distribution amounts in an S Corporation
If your business is structured and taxed as an S Corporation, make sure your salary and distribution payments are optimal. Too often, S Corp owners don’t properly balance the amount the S Corporation pays them as salary vs. distribution. The result can be either higher taxes or an increased audit risk.
5. Take charge of your recordkeeping
To make the most of your business tax deductions, you’ll need accurate, comprehensive records. If you haven’t been keeping track of your business expenses, get caught up now. And if you find yourself struggling with this administrative task, look for a new solution ⎯ whether it’s offloading the task to someone else, investing in a technology solution (like a receipt scanner), or dedicating 30 minutes each week to expense tracking. You’ll be grateful come tax time.
6. Plan equipment purchases
Take advantage of a first-year expense write-off for equipment placed in service by the end of the year. Business owners and self-employed individuals are allowed a first-year depreciation deduction of 100% of the cost of qualifying property acquired and put in service in 2011. For 2011, the maximum amount that can be expensed under Section 179 is $500,000. Note that the limit will drop to $125,000 in 2012, and this bonus first-year depreciation deduction will drop to 50% for property acquired/put into service in 2012.
7. Plan for retirement
If you haven’t done so already, take time to set up a retirement plan or reassess your contributions. Contributing to an IRA, Keogh, simplified employee pension (SEP), or other retirement plan is an essential way to plan for your future and reduce your taxable income. The specific rules, contribution limits, and deadlines vary by plan. Make an appointment with your CPA to discuss the best retirement option for your business.
8. Know your 2% reduction
Did you know there’s good news for your 2011 taxes? Legislation passed in December 2010 included a temporary 2% reduction in the Social Security retirement component of FICA employment taxes (for employees) or the Social Security portion of your self-employment taxes. Think about earmarking those extra dollars to paying down any high-interest debt, making an extra contribution to your retirement plan, or investing in your business (equipment, advertising, software, etc.).
I know it seems like the ink has barely dried on your 2010 taxes, but remember that the best time to plan for your taxes is 365 days a year.
Here’s to your business!
*Original content written by Nellie Akalp for AllBusiness.com: http://www.allbusiness.com/professional-services/accounting-professionals-center/15635993-1.html