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How to Get a Jump on Next Year’s Taxes

How to Get a Jump on Next Year’s Taxes

Question: Now that this year’s April 15 tax filing deadline is behind me, what’s a good business tax planning strategy for 2004?

Answer: Here are a few tips that may improve your tax situation:

– & #8201;Keep track of business interest expense deductions. Does your business need to borrow to finance growth or expansion or to meet other business needs? If so, you can deduct 100 percent of trade or business interest expense you incur.

– & #8201;Deduct all business account fees. You can deduct all account fees you pay to your service provider for company retirement plans or other services, as long as the costs are paid for separately by the business.

– & #8201;Deduct business equipment purchases. Off-the-shelf computer software is now included in the definition of qualified business property. You may also be able to treat monthly lease payments as operating expenses, depending on the type of lease.

– & #8201;Establish or contribute more to your company retirement plan. Contributing to a company-sponsored pension or profit sharing plan can provide you with business tax deductions. The deduction amount can be significant , up to 25 percent of your eligible participants’ compensation, depending on the type of retirement plan, or perhaps even more if you have a defined benefit plan.

– & #8201;Change the structure of your business. Unincorporated businesses such as S corporations, partnerships, and sole proprietorships, are assessed federal taxes using the individual income tax rate. Depending on one’s income, the federal individual income tax rate may be as high as 38.6 percent. Changing to a C corporation status could reduce taxes on business profits not taken as salary.

– & #8201;Invest in tax-wise ways. A business’s assets can be invested in a manner that may help minimize tax liability, such as investments in tax-exempt money market funds or municipal bonds. In addition, if the business is in a lower tax bracket, taxable returns on CDs, agency securities or taxable money market mutual funds may be beneficial.

– & #8201;Take advantage of the dividends-received deduction. C corporations are generally permitted to exclude from their taxable income 70 percent of the dividend income from certain other corporations whose stock they hold. The securities that pay the dividends must be held for at least 45 days.

– & #8201;Meet Tax Due Dates. Consider matching the maturity dates of your investments with the due dates of your tax payments, so the money is there when you need it. There are a wide variety of short-term securities available, with maturities ranging from a few days to a few months. As always, you should discuss these ideas with your tax adviser.

Written by Linda Stirling, a certified financial manager with Merrill Lynch in San Diego.

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