Last-minute strategies to reduce what you owe - 1995 year-end tax planning tips for business owners - Brief Article

Nation's Business, Dec, 1995 by Albert B. Ellentuck

Although it's the 11th hour, there's still time to do some year-end tax planning. Almost all year-end strategies must be accomplished by Dec. 31, of course.

The first step is to estimate your taxable income for beth 1995 and 1996. If the estimates are about the same for both years, you should be able to use the classic year-end strategy of deferring income and accelerating expenses.

For example, to defer income, a lawyer using the cash method of accounting can delay sending out November and December bills until the end of December, so that payments won't be received until 1996. Also, a manufacturer using the accrual method of accounting can delay deliveries or the completion of jobs until January, so that the income won't accrue until 1996.

Under the cash method, income is taxable when received, and expenses are deductible when paid. Under the accrual method, income is taxable when earned, and expenses are deductible when incurred.

Expenses can be accelerated by prepaying items, such as mortgage interest. Also, last-minute purchases of depreciable property can result in some significant tax savings.

For example, a business asset such as a computer that was bought in December would be considered for tax purposes as having been placed in service in the middle of the year, and the owner would be entitled to take half a year's depreciation on the firm's tax return. Moreover, up to $17,500 of the cost of computer equipment could be fully deducted in 1995 under a special rule for small businesses as long as it is purchased by Dec. 31.

There are also numerous tax-planning strategies for individuals. If you plan to sell appreciated stock, for instance, consider waiting until January. This way, you will defer the capital gain until 1996 and defer paying taxes owed on the gain until 1997.

One way for individuals to accelerate expenses is to pay the final state-tax estimate by the end of December. While this payment is generally due in January, paying it early provides a deduction for the 1995 tax return.

Also consider making gifts to your children or grandchildren before the end of the year in order to use your annual gift-tax exclusion, which is $10,000 for each recipient, or $20,000 if your spouse joins in the gift. (For more on the subject, see "Give Today, Or Pay Tomorrow," on Page 66 of the November issue.)

--Albert B. Ellentuck