Ten Tax Planning Ideas for Small Businesses in 2008

by Alan L. Olsen, CPA, MBA (tax)
Managing Partner
Greenstein Rogoff Olsen & Co. LLP

If you are a small business owner looking for cost cutting ideas here are ten tax planning ideas that may result in substantial tax savings.  The following article highlights planning areas often missed by business owners.  You should consult a qualified tax advisor to determine if any of these areas are appropriate for you and your business.

1. S Corporation:  Set up an S Corporation to avoid self-employment tax on profits. If you conduct business as a sole proprietor, a partnership, or a limited liability company the first $102,000 of 2008 profits are subject to a self-employment tax rate of 15.3%. The profits in excess of $102,000 are subject to a Medicare tax rate of 2.9%. These self-employment tax rates are in addition to paying income tax on the profits. An S Corporation is not subject to self-employment tax on the profits earned. But you must take "reasonable" compensation as salary subject to F.I.C.A.
   
   
2. Bad Debt Expense:  A reserve for bad debts is not deductible, but you can write off accounts receivable in the year in which they become uncollectible.  Be sure to take advantage of writing off all those uncollected accounts at year end.
   
   If you used a collection agency, you can deduct a portion of the debt that will go to the collection agency as a fee (around 25%).  You can write off that amount at the time you turn over the receivable to the agency.
   
   
3. Medical Expense:  For 2008, eligible self-employed individuals can deduct from gross income 100% of the amounts paid for health insurance coverage. The deduction is limited to net earned income from the business, less the deduction for 50% of the self-employment tax. Also, you cannot take the deduction for any month you were qualified to participate in an employer sponsored health plan.
   
   If you conduct business as a corporation, set up a corporate medical reimbursement plan. Medical costs are generally personal expenses deductible only to the extent that they exceed 7.5% of your Adjusted Gross Income (AGI). However, medical reimbursement plans set up by C Corporations let you deduct all the medical costs you incur for yourself, your spouse, and dependents. These plans must cover all eligible employees.
   
   
4. Equipment Expense:  For 2008, Section 179 of the Tax Code lets companies deduct up to $112,000 of new equipment, subject to certain limits. Passenger vehicles are excluded from the expensing election. A passenger vehicle is defined as having a loaded gross vehicle weight of less than 6,000 pounds.
   
   The tax code also allows an accelerated method to depreciate the remaining value of that equipment – it’s faster than the straight-line method of depreciation.
   
   
5. Home Office Expense:  Write off home-office expenses.  You can take this deduction even if you use the space for administrative purposes, as long as there is no where else you can work.  When you use one room in your six room home as an office, you can deduct one-sixth of your costs for utilities, security, homeowner’s insurance, etc. as well as all costs for the room such as carpeting.  Although you can also claim the depreciation on your home used for home office, you should consult a qualified tax advisor prior to doing so to understand the impact it will have on the exclusion of gain when you sell your residence.
   
   
6. Travel Expense:  Deduct business trips by putting your spouse on the payroll. When spouses are on the payroll, even at low salaries, cost of business trips that include the spouse can be fully deducted. You should also be aware that putting your spouse on the payroll in 2008 will also double the amount of Social Security tax owed up to the first $102,000 of income.
   
   
7. Hiring Children in the Family Business:  Put your children on the company payroll. When you employ your children in the business, for 2008 you can pay them up to $5,350 in salary free from Federal tax. The “kiddie” tax doesn’t apply to wages, so children under age 18 get this tax break, too. Have your children put $4,000 into a Roth IRA, where it will compound tax-free over time. When the money is left in the account until they turn 59 ½, they will never have to pay out any tax or penalties on that money or its earnings.
   
   If your business is not incorporated, and the children are under age 18, neither you, as employer, nor your children will owe Social Security or Medicare tax on their wages.
   
   
8. Retirement Planning:  Put more money away in your company retirement plan for yourself than for your employees.  Business owners who are more than 20 years older that other company employees can set up a defined-benefit pension plan instead of a defined-contribution plan.  Because they are funding a specific benefit (not putting away a percentage of salary) and have fewer years to do so, owners can contribute more to the plan for themselves than their employees.
   
   
9. Claiming Business Losses:  Make the most of business losses. If your company has a net operating loss in 2008, it can be carried back two years or carried forward up to 20 years to offset future profits. To get a refund, file an application on Form 1139 for corporations and Form 1045 for sole proprietorships. Most refunds are sent out by the IRS within two months.
   
   
10. Education:  Set up a company tuition-reimbursement plan to pay a child’s school cost.  Businesses can set up plans that pay up to $5,250 in tuition per employee annually.  Business owners’ children must work for the company, be older than age 21, own no company stock and cannot be claimed as a dependent on the owners’ tax returns.