Develop a Tax Strategy to Improve Finances
Question: How do I go about developing a tax strategy for my business and what are the benefits?
Answer: Tell business owners that an effective sales and marketing strategy plays a huge impact on their company’s bottom line, and you’ll get no argument. However, having a business tax strategy in place is arguably just as important for your company and can play a powerful role in your business and personal finances.
Ideally, business tax planning should be a year-round effort, but as we get closer to the end of the tax year, there are still a few strategies to consider that may improve your 2004 tax situation.
– & #8201;When it comes to equipment purchases, get the tax benefits while you can.
Remember that the Jobs and Growth Tax Relief Reconciliation Act of 2003 provides business owners with some substantial tax benefits with regard to qualified equipment purchases. In addition to technical equipment, qualified equipment purchases may include new computers or certain new vehicles for your business. As the end of the year approaches, making those necessary equipment purchases now will enable you to reap additional tax benefits.
Thanks to the Jobs and Growth Tax act, businesses can also take a first-year bonus deduction of 50 percent of the equipment cost, with the remaining 50 percent of the cost depreciating during the normal depreciation life. This bonus deduction applies only to new equipment acquired after May 5, 2003, and placed in service before Jan. 1, 2005. (Jan. 1, 2006, for property with a longer production period.)
– & #8201;Defer investment income and accelerate deductions.
Defer investment income into 2005 and accelerate deductions into 2004. If you are a sole owner, partnership or S corporation that has adopted a cash basis accounting system, you can shift cash from money market funds into short-term discount obligations, such as CDs, that mature next year. You could also delay sending year-end billing notices until 2005, prepay estimated taxes or consolidate business tax deductions into this year. Conversely, if you expect your business to be in a higher tax bracket in 2005, or if you expect to be subject to the Alternative Minimum Tax this year, consider accelerating income in 2004 and deferring deductions until 2005 to lower your tax bill next year.
The bottom line is that you should take advantage of savings opportunities on your taxes by acting now.
Written by Linda Stirling, the first vice president and certified financial manager at the Downtown San Diego office of Merrill Lynch.