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There’s Still Time to Save on 2010 Taxes

Even though 2010 is more than half over, there is still time to execute favorable tax strategies. Such tax opportunities exist for sole proprietors, incorporated one-person entities, and small businesses with employees. Taking the time to consider and act upon those opportunities now can lower your 2010 taxes and provide direction for 2011 tax year planning.

Defer income, if possible—If you file your tax return on the “cash basis” method of accounting, and your cash flow levels permit, defer receiving payments for 2010 sales or services to January 2011. Since the income is not reported until the cash is collected, this lowers your 2010 taxable income. If you are incorporated, consider your company’s entity structure and annual profits and losses when implementing this strategy.
Fund a retirement plan—Do you have a retirement plan set-up for you and/or your employees? Setting up and funding a retirement account before year end yields tax savings benefits, too. There are a number of options available, including SEP, Individual 401(k), and Profit Sharing plans. Selecting the best plan depends upon retirement goals, number of participants in the plan, costs of administering the plan, plus some other factors. If you don’t already have a plan set-up, consult with your CPA or banker to find the perfect plan for your business.
Make additional charitable donations—Charitable contributions made before January 1, 2011, count as deductions for 2010. Be sure all donations are documented. You will need documentation from the charity itself if your donation is greater than $250, per the Internal Revenue Service (IRS) guidelines.
Remember to deduct holiday gifts given to clients or customers—The IRS allows self-employed individuals and businesses to deduct the costs of gifts, up to $25 per recipient, per year. Make sure to prepare a list of the recipients to substantiate the deduction.
Write-off bad debts—The IRS allows deductions for actual write-offs, not accounts listed in an “allowance for doubtful accounts” account. Businesses using the accrual method of accounting may take such a write-off. It must be documented that several different attempts were made to collect the debt.
Write-off obsolete inventory—If you have damaged or obsolete inventory, take a tax write-off, and dispose of that inventory before year-end.
Purchase office supplies, pay utility bills, and incur other 2011 expenses before January 1, 2011—Another tax saving tip for the “cash basis” taxpayer is to pay now for items you will use in 2011. Since deductions are only allowed for items that have been “paid for” this strategy can only be used if extra cash is available for these payments. Accrual basis taxpayers deduct expenses as they are incurred, so the timing of payment is not important.
Consider the $13,000 annual gifting option—If you want to pass on funds to family members or friends before 2010 ends, but lack the time or inclination to engage in detailed estate planning strategies now, consider giving them up to $13,000 tax free. The IRS allows individuals to give a family member or friend up to $13,000 a year without the recipient incurring income tax and the donor incurring gift tax.
Deduct health care expenses—If you are self-employed, you may deduct a portion of your annual health insurance premiums on your personal tax return, provided you attained the insurance on your own and not through a spouse or partner’s employer.
Fund a Health Savings Account (HSA) for 2011—Contributions made to a 2011 HSA before January 1, 2011, count as a 2010 deduction.
Pay discretionary bonuses—You may want to reward employees if your business had a good year. If you use accrual basis accounting, consider accruing year-end bonuses. Such bonuses may be deductible as long as they are paid within two and a half months after year-end (March 15 for businesses that base their tax year on the calendar year). Cash basis taxpayers would need to actually pay the bonus in cash for it to be deductible in 2010. The bonuses may be based on reaching certain goals, such as a 10 percent sales increase. Beware though, that other crucial figures, such as labor expenses or cost of sales, may be affected by this accrual or payment of bonuses. Special rules apply to bonuses paid to corporate shareholders/owners. Please consult your tax advisor for specific tax planning in this area.

**April 15 of each year is the due date for filing your Federal individual income tax return, if your tax year ends December 31st. Your return is considered filed timely if the envelope is properly addressed and postmarked no later than April 15. If you use a fiscal year (which is a year ending on the last day of any month other than December), your return is due on or before the 15th day of the fourth month after the close of your fiscal year. If the due date falls on a Saturday, Sunday, or legal holiday, the due date is delayed until the next business day (i.e., Tax Year 2006 was due April 17, 2007). www.irs.gov