Five Ways to Cut Your Tax Bill

By David Meier

Many small business owners don't know the secrets for maximizing tax deductions. In today's economy it's imperative that you understand tax strategies in order to effectively manage your business's tax liability. For some owners, reality sets in after a considerable portion of a year's profits are paid out in taxes. By following some simple tax-saving strategies, your business can reduce its taxes and use more of the profits for growth.

The following are important tax-saving tips you can use in your own business:

Strategy #1: Accelerate the pace of deducting capital asset purchases, including your car. Use asset expensing (Section 179) to deduct up to $100,000 of the cost of equipment purchased and placed into service in your business during the tax year. You also can deduct an additional "special" 50 percent depreciation allowance, in addition to regular depreciation. The same rules apply for your car, except that the maximum asset expensing deduction is $3,060, increasing to $7,660 if the "special" 50 percent depreciation allowance is also taken. And, if your business vehicle has a gross weight rated by the manufacturer of more than 6,000 pounds, it's exempt from the above vehicle limitations and can be treated as any other capital asset.

Strategy #2: Lease property and/or equipment to your business. By leasing your personal assets to your business, you take money out of your business (exempt from Social Security tax), and you can reduce your resulting taxable lease income by taking any applicable depreciation expense on your personal income tax return.

Strategy #3: Compensate employees with a "Tax-free Benefit Plan." Set up a "cafeteria plan" that allows employees to direct a portion of their pre-tax compensation to pay for special benefits. Allowable tax-free benefits include:

1. The payment of employer-sponsored insurance premiums (under a premium-only plan)
2. A Flexible Spending Account (FSA) that employees can set up, from which such payments as health care, day care and adoption expenses are made on behalf of the employee
3. A Health Reimbursement Arrangement (HRA)—creating an employer-funded account from which unreimbursed medical expenses of employees are paid
4. Transportation Benefit Programs that pay employee transit passes (up to $100 per mo.), parking (up to $190 per mo.) and commuter highway vehicle expenses (up to $100 per mo.)

Strategy #4: Travel tax-free. Expenses for airline, taxi, car rental and overnight lodging for business travel are 100% tax deductible, and 50% of meals are also deductible. You must allocate between business and non-business travel when your travel is mixed use. However, if the principal purpose of the trip is business, your travel expenses to and from your destination are 100% deductible.

Strategy #5: Maximize contributions made to your business-sponsored retirement plan, on your behalf. Once you have created your retirement plan, you must take steps to fund the plan, provided that you have "earned income" for the tax year in question. Note: You must adhere to the unique set of deadline dates for the creating and funding of your plan. The more common plans include a SEP (Simplified Employee Pension), a Keogh retirement plan and a 401(k) plan. Annual contribution limits for the SEP, Keogh and 401(k) retirement plans are $40,000 ($42,000 for individuals age 50 or older). A Simple IRA allows employees of small employers (fewer than 100 employees) to make salary reduction contributions of up to $8,000 ($9,000 for individuals age 50 or older). A "Deemed IRA" is a plan that allows employees to make voluntary contributions (via payroll deductions) that are used to fund their own Traditional or Roth IRAs.

© BellSouth Telecommunications, Inc.

This article is excerpted from Surviving and Thriving in Today's Economy, a 32-page booklet published by BellSouth Telecommunications which is designed to help small business owners succeed in the midst of a challenging market. Contact BellSouth Small Business Services at 888-868-3840.

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Author Bio: David Meier is the founder and COO of Entrepreneur Rising, which provides small-business owners with the ongoing coaching, knowledge and support they need to become successful entrepreneurs. Visit the Entrepreneur Rising website at: www.entrepreneurrising.com for additional small business tax-saving tips and other information of interest to small businesses.