10 smart tax-saving tips for small businesses

Home Office Computing, Dec, 1990 by Linda Stern

Needless to say, you've probably been planning your taxes all along; but in case you overlooked a couple of details, you can still squeeze in some tax-saving strategies before the year ends.

That's why so many people adjust their tax situation between now and January 1. It's worth it. If your federal tax rate is normally 28 percent as a sole proprietor, then your business tax rate is 28 percent plus 15.3 percent in Social Security self-employment taxes. When you include state income taxes, it can add up to a rate of 50 percent or more on your net business income. At that margin, every dollar you earn nets you only 50 cents--but every deductible expense really costs only half-price.

Understood? Good. Here are 10 classic tax-saving tips for home-based businesses.

1. Fund pension plan. Set up a Keogh plan and fund it to the max. This is absolutely the best break that the self-employed get. A Keogh allows you to save 20 percent of your income--up to $30,000 a year--in a tax-deferred retirement account. Your initial contributions are tax deductible, and you pay no taxes on the account until you start withdrawing funds after you turn 59 1/2.

Keogh savings are so great that even if you pull money prematurely and pay a 10 percent penalty, you can still come out ahead. While every case differs, this will typically be true if you keep money in the plan for more than five years.

You have until April 15 to decide how much you want to put in your Keogh for calendar year 1990--but you have to establish the account before the end of this year.

And for those who already have a Keogh or other pension plan, my advice is

simply to sock away as much money as the law allows and you can afford.

2. Deduct equipment. Buy something for your business. If you haven't already spent $10,000 on equipment this year, buy a fax machine, a laser printer, a new bookcase, or whatever else you think you'll need in the next year. Section 179 of the tax code lets small businesses deduct up to $10,000 in equipment in the year they buy it, without taking years to depreciate the purchase.

Even if you buy the equipment during the last week of December and charge it to a credit card that you get the bill for in January, you get the deduction this year.

3. Depreciate equipment. Consider depreciating all of your office furnishings, even if you just brought them in from elsewhere in the house. This is a legitimate, but often overlooked, tax-saving tactic. Patricia Drolet, a partner in the Washington, D.C., accounting firm of McQuade & Capron, says it can be worth taking the time to analyze your office furniture piece by piece to remember where the desk, lamp, chair, and curtains came from. If you know you bought some item, but can't find the receipt, take a moment to document when and where you bought it and how much it cost. If you purchased it this year, you may be able to deduct it under Section 179; otherwise, depreciate its current value.

4. Be charitable. Instead of documenting all your old office furnishings, you can give them away and start with new equipment. The same goes for your old computer or copy machine, but there's a catch: If you've already taken the Section 179 deduction on your old equipment, you can't get another deduction for donating the same equipment--it already has a book value of zero.

If you are using business equipment that you never officially brought into the business, though, you can give it to a nonprofit organization and get a tax deduction. It's a worthy gesture; a computer is far more useful to many operations than a check for $25.

5. Defer income. What's the best way to manage your year-end cash flow? Defer income into 1991 by sending your invoices out at the end of December. Bring deductions into 1990 by paying deductible expenses before the end of the year.

There's at least one exception to the defer-income rule. For 1990, you have to pay the 15.3 percent self-employment tax on income only up to $51,300. If your net income is near or above that figure, you might want to bring more income into 1990 to avoid paying self-employment tax on that higher income.

6. Pay adequate estimated taxes. A friend of mine, a successful, self-employed architect, has not paid a penny in estimated taxes in the three years he's been in business. But he's paid thousands of dollars in penalties. I don't say this to my friend's face, but that's really dumb.

Make sure you pay enough estimated taxes. As long as you pay at least as much as the amount of your tax bill last year, you'll avoid the 10 percent penalty. To avoid tax-paying problems, one good idea says that, when a client pays you for a job, you should immediately put 30 percent in a separate bank account.

7. Don't pay too much estimated taxes. There's no sense in letting the Treasury live off your interest. Once you're certain that you are paying enough estimated taxes to avoid penalties, save the rest. Put money you think you may owe in taxes in a bank account or money market fund. There's time enough to pay next April.