The new year is about to begin, so review your tax situation as you decide how to start the year off right.
1. Read your odometer
If you use your personal car, truck, or van for business, be sure to jot down your odometer reading on January 1. This will help you track your business mileage throughout the year, so you can claim a deduction for this driving. You’ll also need to keep a record of all your business driving. Without this record, your deduction may be disallowed.
2. Decide whether to become an S corporation
If your business is already incorporated, you generally have until March 15, 2012 to elect to be taxed as an S corporation. This means the owners, rather than the corporation, pay tax on the business’ profits. Electing by this date lets you be treated as an S corporation for the entire year. The election is made by filing IRS Form 2553.
If you incorporate a business in 2012, you have two months and 15 days from the start of the corporation to make the election. For example, if you incorporate on January 7, 2012, you have until March 21, 2012 to file the election form with the IRS.
Talk with your tax advisor about whether an S election makes sense for your company.
3. Determine contributions to your FSA
If your company has a flexible spending account (FSA), you usually have to decide how much to contribute for the new year before the year begins. For 2012, it is up to the company to set limits on how much an employee can contribute from their salary to the FSA. (Starting in 2013, the tax law sets a limit of $2,500 per year.)
If your company does not yet have an FSA, discuss with your tax advisor the feasibility of adding one now. Even if you start mid-year, you and your staff can benefit from it.
4. Decide on contributions to your 401(k)
If your company has a 401(k) plan, usually you have to decide how much to contribute for the following year before the year begins (just like with the FSA). The elective deferral limit for contributions from an employee’s salary is higher in 2012 than it was in 2011 ($17,000 in 2012 versus $16,500 in 2011). Those who are at least 50 years old by the end of 2012 can add another $5,500 to the account. Contributions, however, cannot exceed wages.
If your company does not have such a plan, consider starting one. You can use a 401(k) plan, even if you are the only one who works for the business. A solo 401(k) enables you to maximize your annual retirement-plan contributions for yourself because you can use the maximum employer contribution as well as the employee elective deferrals. These contributions are allowed whether you are an employee of your corporation or you are a self-employed person.
5. Decide whether to use an HSA for 2012
If you do not yet have health insurance in place for your company, a high-deductible health plan combined with a health savings account (HSA) might be a good move. This can be an affordable way to provide health coverage.
You can decide whether you, your employees, or an employer/employee combination will pay the insurance premiums or make the HSA contributions. If you pay the premiums, you may even qualify for the smaller employer health-insurance credit of up to 35 percent of these premiums.
Hopefully, 2012 will be a good revenue year. This is all the more reason to get your tax ducks in a row so you can minimize the portion of your profits that you’ll have to share with Uncle Sam.
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. She is a trusted professional advocate for small businesses and entrepreneurs and the publisher of Idea of the Day and monthly e-newsletter Big Ideas for Small Business. She hosts Build Your Business radio. Follow her on Twitter @BarbaraWeltman.