Money Matters

Year-End Tax Planning: When to Spend

You can put more money in your pocket by doing effective tax planning. Before the year ends, take some time to consider the steps you can take to reduce your tax bill.

 

What would you think of your travel agent in a situation like this? You are planning a trip so you called your friendly travel agent and told her that you would like a quote for airfare for your spouse and two children, rental car, hotel at the Four Seasons for six days and tickets to the local attractions.

In a couple of days, your agent called you back with the prices.  She said she has good news for you. She has the price, but you have to book the trip now. “But what is the price?” you ask. “Well, that really depends,” she says. “You see, the way it is now, the price would be $6,100. But they are talking about leaving the price where it currently is and, if that is the case, then you would only pay $4,000. But that’s not all, they are thinking about changing the price to $4,950. In any case, you have to book now and we will tell you what the price is later.”

Nobody would do business like that, but that is what we are facing when it comes to 2010 and 2011 tax planning.  Are Congress and the President going to keep the taxes as they are now, the so called “Bush tax cuts” or are they going to let them expire and everybody gets a big tax increase? There’s also a third option that is sort of a blend of the other two.

Regardless, now is the time to save money by tax planning. We all know that we can put more money in our pocket by working hard and bringing additional business through the door.  But don’t forget that you can also put more money in your pockets by doing some effective tax planning. This is a big deal. Think about it — given that many salons and spas are in a 33% tax bracket, to find $100 of deductions saves you $33. To find $100 worth of credits saves you $100. So now is the time to determine the moves you need to make to reduce your taxes.

Because of the uncertainty of the tax rates and laws, it is more important than ever to do pre-year-end tax planning.  Gather your information, set up a time with a tax advisor, and determine what your taxes are going to be based on your current situation. Estimate what’s going to happen for the rest of the year, then your advisor can step back and make recommendations for you. Hopefully by December we will know what the tax laws will be in 2011 so we can better structure 2010.

Here are just a few of the many business items you can use to keep Uncle Sam out of your pocket:

  • If you are a “cash basis” salon or spa, as you get close to year-end, don’t forget to mail your checks for deductible items before the end of 2010 to ensure the write-off. You can claim the deduction in the year that the check is dropped in the mail. The check does not have to clear the bank in order for it to be deductible.
  • You can use credit and debit cards to pay bills, but make sure you understand the rules. Credit cards are deductible at the time you actually charge the item; whereas, a debit card is not deductible until the bill has cleared the bank.
  • Many times, the end of the year is the time to give bonuses to staff. If you do the bonuses in 2010, they are deductible this year. If you wait until after the first of the year, you do not get to take the deduction until 2011. If we find that the tax rates are going up in 2011, you should perhaps wait and write the checks in 2011 to get the write-off at a higher rate. On the other hand, if the rates stay the same and your income is going to be similar, write the checks in 2010.
  • If you have equipment needs, in 2010 you can write off up to $500,000 of equipment in the year of purchase and placement in service. This amount is supposed to drop in 2011, but with the economy in the shape that it is in, those people who have their fi nger on the pulse of Congress think that amount will continue. Either way, if you do have equipment needs, this a great way to slash your taxes. Remember, the equipment not only has to be purchased but also has to be placed in service.
  • If you have children or retired parents or other relatives who are doing work for the salon, don’t forget to pay them a reasonable compensation. A child for example, can have income up to $3,650 without any federal income tax in 2010.  If you are in a 33% bracket, this saves you $1,200 and costs the child no federal tax. Make sure it isreasonable and make sure you have good documentation.
  • You need to determine if you have any long-term capital gains that you could take in 2010. If you are in a 15% bracket, there is no tax on capital gains in 2010. Depending on what they do in Washington, your capital gains could be 20% or higher next year.
  • If you are organized as a C corporation, planning this year is more important than ever. In 2010 dividends are taxed at a zero to 15% federal bracket. If they leave the law as it currently is planned to be for 2011, you could be in a 39.5% bracket in 2011 on the same income. Plan ahead.
  • The purchase of retail inventory is not a deduction until such time as that retail inventory is sold. On the other hand, for most salons and spas, the purchase of back bar items are deductible when purchased. If you are in a high tax bracket and you’re going to need back bar items at the beginning of 2011, stock up and pay for them now and get a 2010 tax deduction.

These are just a few of the business items you can plan for to save taxes.  Note, everyone’s situation differs so it is important that you get personal advice on your situation. You want to make sure as you put together your tax philosophy that you are not spending money foolishly. It would be silly to spend $1,000 on something you don’t need just to save $333. If this were the case, you would be out $667. Good business people realize that taxes are a cost of doing business. It is important to minimize that cost; but, at the same time, you don’t want to be foolish about it.

Note: The information provided does not constitute legal, tax, accounting, or financial advice and is offered as an information service only. Those seeking specific advice should contact a professional advisor. No liability whatsoever is assumed in connection with the use of this information.

Larry Kopsa is a CPA with Kopsa Otte CPAs & Advisors (www.kopsaotte.com). He can be reached at info@kopsaotte.com or (800) 975-4829.

Keywords:   taxes  

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