Last-Minute Business Tax Deductions for 2010

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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It’s the end of the year, and you’re already thinking about 2011. If you’re looking at your first-quarter cash flow, one thing you can do to improve it is to minimize your 2010 tax bill (or maximize your refund). There are still several things you can do before the end of the year to claim deductions or take advantage of tax rules that are ending this year. Some may require spending a little money, while others are more a matter of timing.

Buy now, deduct now, and pay later.

“Deduct charged expenses. Both cash and accrual basis taxpayers can charge expenses on a credit card and deduct them in the year charged, regardless of when paid.”

Macy Story
Tax Manager, BKHM CPA

If you’re planning any big-ticket purchases…

“It would be advantageous from a tax standpoint to buy any large fixed asset purchases by December 31, 2010 as opposed to January 1, 2011 because there are currently special bonus depreciation rules enacted for 2010 that allow an expense for 50% of the purchase.”

Brian Schlang, CPA
Morrison, Brown, Argiz & Farra, LLP

And if one of them is a car...

“Maximize auto depreciation for 2010 purchases. If you buy a new car and place it in service before the end of 2010, your first year depreciation deduction will be $11,060. If you wait until 2011 (assuming Congress doesn't extend the bonus depreciation deduction and the 2011 first year depreciation cap is the same as for 2010), your first year depreciation deduction would be only $3,060.”

David Kostmayer, CPA
Barrett & Kostmayer, PLLC

Do you have business property that you’ve held for more than a year and are considering liquidating?

“Due to the presumed expiration of the Bush Tax Cuts, you should review your investments and clean house as the Capital Gains rate increases to 25% from 15% as of January 1, 2011. Along with this change, the reduced tax rate treatment for some dividends also increases in a like manner. So, if you have investments that you are looking at changing up, do it before the end of the year to save some on the tax front.”

Eric M. Anderson, CPA
www.ema-cpa.com

Do you develop software? You‘re entitled to a little extra credit.

“Assuming Congress extends the R&D Tax Credit, 2010 is not limited by AMT (Alternative Minimum Tax). In your industry, identify what you've spent on any software development projects, whether for in-house use, or for providing value-add to your client base. These costs could include the salaries for your in-house coders, or the invoice dollars spent on outside developers. The R&D Credit reduces your tax liability approximately 7 cents for every dollar spent on these innovative efforts.”

Brian Lefever
VP of Operations, Titan Armor

Was this your first year in business, or are you considering starting a new venture soon?

“The Small Business Jobs Act of 2010 temporarily increases the amount of start-up expenditures entrepreneurs can deduct from their taxes for this year from $5,000 to $10,000 (with a phase-out threshold of $60,000 in expenditures), offering an immediate incentive for someone with a new business idea to invest in starting up a new small business today. ”

Michael Kaplanidis, CPA
Managing Director and Founder, Water Street Associates

And finally some food for thought, especially if you’re expecting 2011 to be significantly better than 2010...

“Normally tax professionals recommend that, to defer paying taxes, you claim whatever business deductions you can before the end of the current year and defer whatever income you can to the following year. However, 2011 is likely to see a tax increase, particularly for high-income taxpayers. Therefore, it's possible that a deduction claimed in 2011 will be more beneficial (save more tax) than the same deduction claimed in 2010.”

Jan Zobel EA
www.JanZtax.com

As you can see, some of these options could potentially save you thousands of dollars by acting before the end of the year — not just accelerating a year of cash flow, but in actual savings. These are provided here for educational purposes — a starting point for a conversation with your CFO, CPA, and tax attorney. Keep in mind that tax planning and tax preparation are two different things. If you’ve only hired your CPA to do your tax preparation, don’t expect them to get overly creative. Have a separate conversation with them about some of these options you may want to explore — the sooner, the better.

For more tax-break information, check out our articles on New Tax Breaks for the Swift and 31 Small Business Tax Deductions.