New laws complicate end-of-year tax plan

By Rhonda Abrams
Gannett News Service

Each December, I have the unpleasant duty of interrupting my readers' holiday activities with a reminder that in just a few short months, tax time will roll around. My motive is pure: I want to save you money — legitimately — on your taxes next April.

While it's always important to take year-end tax-saving steps, this year's planning is a bit more complicated. You need to assess whether your business was affected by the tax laws passed by Congress this summer, and how your business fared during the nation's economic slowdown.

For instance, in most years, the golden rule of late-year tax planning is "defer income, accelerate expenses." But if you've had a bad year and expect one better, you may want to do the reverse: Encourage clients to prepay for products or services, for instance, and push hard to collect any overdue invoices before Dec. 31.

As to tax law changes, the most important one is the reduction in the personal income tax bracket. Few others appear to affect small businesses directly unless you make large capital expenditures of depreciable assets or are selling your company. Here are the major tax changes to keep in mind:

• The top individual income tax bracket has been lowered from 38.6 percent to 35 percent.

• Capital gains rates have been reduced to a maximum rate of 15 percent (down from 20 percent) for taxpayers in higher income brackets, and from 10 percent to 5 percent for taxpayers in the two lowest tax brackets, effective for capital gains after May 5, 2003.

• The Section 179 "expensing" amount has increased from $25,000 to $100,000. This is the amount of depreciable assets you are allowed to write off in one year instead of depreciating over the life of the asset.

So what can you do now to lower your business taxes?

• Buy a van or truck. The biggest depreciable asset purchased by most small companies is a vehicle. Before this year, "nonpersonal" business trucks or vans had to weigh at least 6,000 pounds to qualify for the Section 179 expensing option (the so-called "SUV tax break"). Now qualified, nonpersonal utility vehicles placed in service after July 7, 2003, can be completely deducted in 2003, regardless of weight, as long as your total expensing doesn't exceed $100,000.

Say you had $60,000 in earned income in 2003 after all other expenses, and were in the 30 percent tax bracket. You'd pay $18,000 in taxes before deductions. Buying a $20,000 truck or van would lower your taxable income to $40,000 and you'd pay $12,000 in taxes. The government would pay for $6,000 of your new vehicle.

• Structure the sale of your business carefully. Selling stock qualifies as capital gains (15 percent) while selling assets is treated as ordinary income (up to 35 percent). If you're selling a business, try to structure the purchase as a sale of stock rather than a sale of assets.

• Set up a Dependent Care Assistance Program. I discovered an inexpensive way to put more money in my employees' pockets. By setting up a simple DCAP, I can reimburse them up to $5,000 in childcare expenses. They don't pay income tax on the reimbursement, and I don't pay payroll taxes. Ask your accountant if you should put a plan in place before year's end.

Try playing around with the Tax Relief Estimator at the TurboTax Web site (www.turbotax.com — click on "Tax Calculators") to see if you should go truck-shopping this weekend.

Rhonda Abrams is the author of "The Successful Business Plan: Secrets & Strategies."