Year-end tax planning: 5 tips for the self-employed
NEW YORK (Reuters) - There's little time left in the year for tax planning. While most year-end tax planning stories focus on employees with tips about spending down flexible spending accounts and the like, if you're self-employed or a small-business owner, you've got more options for tax planning than those who receive W-2s from their employers.
But there's also more reason to be careful and to keep good records, as Schedule C filers have come under increasing scrutiny by the Internal Revenue Service.
Here are five things to consider before year-end:
1. Do your estimated taxes. While fourth-quarter taxes aren't due until January 15, it's tough to do your year-end planning if you don't know what those numbers will be. And as anyone who's ever tried to estimate their taxes knows, those numbers can change wildly throughout the year depending on what business came through (or didn't) and how well (or poorly) you estimated the first time.
We're not suggesting you pay early, but by coming up with an updated estimate - and determining whether or not you'll be subject to the Alternative Minimum Tax - you'll have a better handle on what needs to be done in the remaining days of 2011. And remember: Regardless of how the stalemate in Congress over the payroll tax cut plays out, you do get to account for that tax break in your 2011 calculations.
2. Figure out whether to push income and deductions to 2012 - or to accelerate them into 2011. Timing is a much bigger issue when you have your own business than when you're working for someone else. For tax purposes, it may be to your advantage to accelerate income into this year - or to push it off to 2012. The same holds for deductions.
Why would it matter? If, for example, you had a large capital gain in 2011, which pushed you into a higher tax bracket or into the AMT for this year only, you might want to delay receiving additional income that would be taxed at that higher rate. On the other hand, while it's rare that you'd want to accelerate income as a matter of course, this may be one of those times that you do: That's because if Congress doesn't act and the payroll tax cut expires, you'll get to keep more of any income you receive this year than you will next year.
3. Buy a new computer. There's a special deduction for small businesses known as Section 179. This allows you to immediately deduct the costs of qualifying business equipment and software - such as a new computer for your office - rather than depreciating that cost over many years.
The maximum amount a small business, or self-employed Schedule C-filer, can write off in 2011 is $500,000. While this tax break has historically been extended, given the gridlock in Washington that's not assured. If Congress does nothing, the amount of the Section 179 deduction will drop to $25,000 for 2012. Of course, that still leaves you enough room to buy a new computer next year, but investing in equipment before the end of the year gets you the break sooner.
4. Contribute to your SEP-IRA. Okay, you actually have until April 15 to do this. But given the market's volatility, you may want to start thinking about it now, or dollar-cost-averaging your way to a full contribution, to make the most of your investment dollars. Also, if you have self-employment income and haven't yet opened a SEP-IRA, you need to set one up before December 31 in order to make a 2011 contribution. In general, you can set aside up to 25 percent of your business income (or up to $49,000 max) in these tax-deductible retirement accounts.
5. Take advantage of the tax break for investing in a qualified small business. This special tax break, which goes by its acronym QSBS and was designed to stimulate the economy, goes to investors in certain small businesses. It's not exactly a self-employed person's tax break, but it's a huge benefit for those who can do afford to make such an investment.
That's because if you buy shares in a qualified small business by year-end, you'll be able to take all the gains on that investment tax-free. On the other side, if you're running a small business and looking for funds, that tax break might make it easier to seal the deal with investors in a tough economic climate.
To be considered "qualified," among other things, the small business must be a domestic C corporation with no more than $50 million in assets, and can't be in the business of banking, financial services or other professional services.
The author is a Reuters contributor. The opinions expressed are her own.
(Editing by Beth Gladstone)