Understanding the new tax laws: A CPA's guide for small businesses

              Tax Credits, Take advantage of any tax credits that are available to you. A targeted jobs tax credit is available for employing certain employees and youth workers. Credits are also available for expen­ditures for certain research and experimentation, and for costs incurred to render facilities acces­sible to the handicapped.
Obsolete Inventory. Review the rules for
deducting obsolete inventory. Goods that are not able to be sold at normal prices or in the normal way because of damage or changes of style may be valued at bona fide selling prices, less direct costs of disposition. Take necessary steps, such as disposing of obsolete inventory, before year end to realize losses expected.
C Corporation Inventory, C corporations may want to contribute inventory to charity. The business may be able to deduct the cost of the inventory plus half the value above the cost if the charity uses the property for its tax-exempt purpose and solely for the care of infants, the ill or the needy.
Another point to keep in mind is that when the cost of inventory is rising, you may be able to
reduce your taxable profit by using the “last in, first out” (LIFO) method of inventory accounting.
S Corporation Losses. If you are a shareholder in an S corporation, you must have a basis in the corporation by the corporate year-end in order to deduct currently a net loss passed through to you from the corporation. You can establish basis through a capital contribution or personal loan to the corporation consummated by the corporate year- end. You may need projections of the corporate loss prior to year-end to enable you to establish adequate basis.
Bad Debts. If your business uses the accrual method of accounting, review outstanding debts before the end of the year. If you have bills with little chance of collection, write them off immediately. The IRS allows the deduction only in the year the debt becomes worthless.
State Income Tax. State income-tax planning is an often overlooked opportunity to lower your over­all tax liability. You may be able to reduce state taxes by modifying shipment procedures, moving locations and levels of inventory from one state to another, and taking full advantage of tax credits unique to a particular state.
Employees vs. Independent
Contractors. Be sure to know the rules regarding treatment of an individual as an indepen­dent contractor versus an employee. While you may save on payroll taxes and fringe benefits by classifying a worker as an independent contractor, the tax penalties that result from incorrect classifi­cation can be high.
Retirement Plans. One of the best ways to
reduce your personal tax bill is to take advantage of retirement plans. For self-employed individuals, the best plan is often a Keogh. Keogh contributions are deductible up to the lesser of 25 percent of your self-employment income or $30,000. In addition, as long as your Keogh is established by the end of the year, you have until April 15, or the date of your last extension, to make your deductible contribution.
An alternative retirement plan for the self- employed is the Simplified Employee Pension (SEP) plan. Generally, SEPs are less complicated and less expensive to administer than Keoghs.
Expert Advice from a CPA. Under the new tax rules, minimizing your business’s taxes will take more work than ever before. For help in devel­oping a year-round tax plan, consult your GPA.
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Understanding the New Tax Laws
A CPA’s Guide for Small Businesses