With the new year approaching, taxes continue to be an area of concern for many business owners. Here are some tried-and-true ways you can minimize your 2011 taxes so you can get a jump on the new year.
1. Adopt an accountable plan for reimbursing your employees.
If you meet IRS requirements, the reimbursements to employees for their travel and entertainment costs are not treated as additional compensation. This saves you employment taxes because the reimbursements are not subject to FICA or FUTA taxes. Employees like this arrangement because they do not have any income included on their W-2 form for the reimbursements.
An accountable plan is an arrangement adopted by your company that requires:
- A business connection for the expense and that the expense is reasonable.
- Reasonable accounting by employees for the expenses.
- Repayment by employees in a reasonable time of all excess reimbursements they received.
An accountable plan can be used for more than just travel and entertainment costs. As long as the accountable plan meets IRS requirements, it can be used for reimbursements of employee tools, uniforms and other items.
Details of accountable plan requirements are in IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses (PDF).
2. Keep receipts for vehicle expenses.
If you use your personal car, light truck or van for business, you can rely on a fixed mileage rate set annually by the IRS to determine your write-off for business use of the vehicle. The rate for 2011 is 51 cents per mile. However, if you keep receipts for gasoline, repairs and other vehicle-related expenses, you can deduct your actual costs rather than relying on the IRS rate. The only way you’ll know whether the IRS rate or the actual expenses result in a greater deduction is to compare the two at the end of the year.
- Be sure to keep a good record of your driving. Include the date, odometer reading, destination and purpose of each trip. No deduction is allowed without this substantiation.
- You can deduct your parking fees and tolls as long as you have proof of what you paid.
3. Put children on your payroll.
If you have teenagers who live at home and can provide services for your business, you can pay them and save money for the family. They learn responsibility and job skills, and they can receive up to $5,700 of earnings in 2011 tax-free. Plus you get work done that needs to be done, transforming a nondeductible allowance into deductible payments:
- The earnings paid to your child are a tax-deductible business expense.
- If you are a sole proprietor and your child is under age 18, you do not have to pay and FICA or FUTA taxes on their earnings.
Keep good records of the time the child works and the work performed in case the IRS questions your return.
4. Choose the right retirement plan.
If you want to maximize your retirement savings for 2011, especially if you work alone and have no employees, consider using a 401(k) plan rather than a SEP. For example: You work alone, are under age 50, and have net earnings from self-employment of $100,000. If you create a 401(k) plan, you can add a total of $49,000 to the plan, comprised of $16,500 of salary reductions, the so-called employee share, plus $32,500 of employer contributions. (Those who are age 50 or older can add up to $54,500 to the plan in 2011.) In comparison, a SEP, which requires no annual reporting, would limit your annual deductible contribution to $18,587 (20 percent of $100,000 reduced by one half of the self-employment tax, or $7,064).
Details of retirement plans are in IRS Publication 560, Retirement Plans for Small Business (PDF).
5. Change accounting methods where appropriate.
There are a myriad of special accounting rules that can result in quicker write-offs, deferred income or other tax-saving measures. For example: Your business has inventory and you currently use FIFO (a first-in first-out rule) to determine your cost of goods sold. If you change to LIFO (a last-in last-out rule), you may be able to minimize the income from inventory sales. When changing methods, some changes can be automatic as long as you file IRS Form 3115; some require IRS consent, which is requested by filing the same form. Be sure to work closely with your CPA or other tax advisor to survey the accounting method changes that might benefit your company.
Details of changing accounting methods are in IRS Publication 538, Accounting Methods and Periods (PDF).
Barbara Weltman is an attorney, prolific author with such titles as J.K. Lasser’s Small Business Taxes and The Complete Idiot’s Guide to Starting a Home-Based Business, and trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® at www.barbaraweltman.com and host of Build Your Business radio. Follow her on Twitter @BarbaraWeltman.